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You want to start your own consulting business and believe it could produce cash flows of $5,600, $48,200, and $125,000 at the end of each of the next three years, respectively. At the end of three years you think you can sell the business for $450,000. At a 14 percent discount rate, what is this business idea worth today?

-$430,109
-$311,406
-$514,545
-$478,901
-$345,738

Respuesta :

Answer:

The worth of the business today is $ 430,109

Explanation:

The worth of the business is calculated as present value of the business using the present value formula for each of the relevant cash flow.

The formula is PV=FV/(1+r)^n

FV is the future cash flows receivable in the relevant years

r is the rate of the discounting factor

n is the relevant time horizon for each relevant cash flow.

The detailed computation of worth of  the business is found in the attached spreadsheet,note that the terminal value of the business of $450000 was also discounted using year three discounting factor as the business terminates in year 3

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