Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Sam wants to start a small commercial bakery to supply gourmet desserts to local restaurants. He believes that with his product line and his connections

Sam wants to start a small commercial bakery to supply gourmet desserts to local restaurants. He believes that with his product line and his connections in the restaurant business, he can grow the business over the next five years into a profitable niche player in the pre-made food supply business. Sam projects the following cash flows (after any necessary reinvestment in the business): Year 1 $250,000 Year 2 $550,000 Year 3 $750,000 Year 4 $1,150,000 Year 5 $1,300,000 Sam thinks the increase in profits will peak in about year six at $1.5 million, and that after that, they will grow at about 6% per year. Sam is going to put up half the money and an investor associate is putting up the other half. This investor puts money into a lot of early-stage companies, and he usually expects to make about 40% return. Sam figures that once the business matures, he and the investor should only expect to make about 15% on the business, as that is similar to what some small publicly traded commercial bakeries make. Using discounted cash flows (including the terminal value), what is the net present value of Sams business?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Auditing

Authors: Alan H. Millichamp

8th Edition

082645500X, 9780826455000

More Books

Students also viewed these Accounting questions

Question

A study based on

Answered: 1 week ago