Business, 19.03.2020 00:06 mohayon2020

Your neighborhood self-service laundry is for sale and you consider investing in this business. For the business alone and no other assets (such as building and land), the purchase price is $240,000. The net cash flows for the project are $30,000 per year for the next 5 years. You plan to borrow the money for this investment at 5%.

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The complete present value calcuation is below.The net present value of this project is: $77,930.58 (assuming a value for the sale of the business equal to the purchase price).

Explanation:

For this problem, the first and basic question is:

Prepare a net present value calculation for this project. What is the net present value of this project?Solution

The net present value is equal to: the present value of the future cash flows less present value of the investements.

1. Present value of the future cash flows:

The discount factor is equal to 1 / [1 + (1 + r)ⁿ]

Where:

r = 5% = 0.05n = the number of year

Year Cash flow Discount factor Present value

1 $30,000 1/(1 + 0.05) $30,000/1.05 = $28,571.43

2 $30,000 1/(1 + 0.05)² $30,000/(1.05)² = $27,210.88

3 $30,000 1/(1 + 0.05)³ $30,000/(1.05)³ = $25,915.13

4 $30,000 1/(1 + 0.05)⁴ $30,000/(1.05)⁴ = $24,681.07

5 $30,000 1/(1 + 0.05)⁵ $30,000/(1.05)⁵ = $23,505.78

5 $240,000* 1/(1 + 0.05)⁵ $240,000/(1.05)⁵ = $188,046.28

*For the year 5 you must also consider the value of the business, which is unknow. You should have some information about it. Although unrealistic, at this stage we can just assume a value: let's say it is the same purchase price: $240,000. That is what the last line shows:

The discount the value of the value of the business is:

$240,000 / (1.05)⁵ = $188,046.28

The total present value of the future cash flows is the sum of the present values of all the cash flows:

$28,571.43 + $27,210.88 + $25,915.13 + $24,681.07 + $23,505.78 + $188,046.28 = $317,930.58

2. Calculate the net present value:

Net present value =

= Total present value of future cash flows - investment

Net present value = $317,930.58 - $240,000 = $77,930.58

Answer from: Quest

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Answer from: Quest

rational decision making is a multi-step process for making choices between alternatives. the process of rational decision making favors logic, objectivity, and analysis over subjectivity and insight. the word “rational” in this context does not mean sane or clear-headed as it does in the colloquial sense.

hope this

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Your neighborhood self-service laundry is for sale and you consider investing in this business. For...

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