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15 November, 01:45

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

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  1. 15 November, 02:10
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    This business idea worth $430,127 today

    Explanation:

    Today value of the future cash flows can be calculated by discounting the cash flows on the given discount rate. It is called the present value and sum of present value of all cash flows is called Net present value.

    We use following format to calculate NPV for the given business idea

    Years 1 2 3

    Cash Flows $5,600 $48,200 $125,000

    Sale Proceeds $450,000

    Net Cash Flows $5,600 $48,200 $575,000

    Discount Factor 14% 0.8772 0.7695 0.6750

    Present values $4,912.32 $37,089.9 $388,125

    Net present value of business idea = $4,912.32 + $37,089.9 + $388,125

    NPV = 430,127.22
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