Question
` Mr. Need-a-Business is considering buying a business. After exploring a number of options, he seems to be settling on Business-For-Sale Ltd . Mr. Need-a-Business
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Mr. Need-a-Business is considering buying a business. After exploring a number of options, he seems to be settling on Business-For-Sale Ltd. Mr. Need-a-Business supplied the following information:
Adjusted balance sheet value $200,000
Mr. Need-a-Business annual salary $75,000
Accepted rate of return for the risk 25%
Company net income $147,650
- Mr. Need-a-Business then asked you to calculate the value of the company using the excess earnings approach. You are asked to include all working, so that Mr. Need-a-Business can reproduce it in the future for other business opportunities. Assume that the net income of the business will increase by 15% over the next year.
- Mr. Need-a-Business then requested that you used the discounted future earnings approach. The following information was provided based on a consultants projections:
| PROJECTED NET INCOME | |||
| Year | Pessimistic | Most Likely | Optimistic |
| XXX1 | 145,000 | 150,235 | 160,400 |
| XXX2 | 155,320 | 165,000 | 170,900 |
| XXX3 | 161,100 | 170,120 | 180,520 |
| XXX4 | 170,690 | 180,500 | 190,000 |
| XXX5 | 179,200 | 185,200 | 195,200 |
|
| Yr 1 | Yr 2 | Yr 3 | Yr 4 | Yr 5 | Yr 6 |
| PVIF (25%) | 0.800 | 0.640 | 0.512 | 0.410 | 0.328 | 0.262 |
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