Tom Kim started a clothing line. He signed a lease for a warehouse which costs $15,000 a year. The clothing line is too time-consuming, and he has asked you, as his accountant, to help him in determining the value of his company so he can sell it.

In year one, he is just working on production and will not have any sales. In years 2-5, he expects to have sales of $400,000 each year. Years, 6-10, sales are expected to grow to $600,000 each year. Years 11-20, he expects sales to be $700,000 a year and years 21-30, annual sales will be $750,000.

During the first five years, expenses in addition to the lease are expected to be $100,000 a year. Years 6-20 these expenses are projected to be $150,000 and years 21-30 they will be $125,000.

Assume the relevant market rate of interest is 8% and all receipts and payments are made at the end of each month/year. The lease is transferable, and the buyer can assume the lease.

What is the minimum price, Tom should accept if he sells his business?

Answer rating: 100% (QA)

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