Scenario #1

You are the potential buyer of a business, a shoe store. You are negotiating with the seller: The seller is offering a selling price of $500,000. The seller calculated the NVP (business value) of $500,000, by forecasting future cash flows and applying a discount rate of 12%. In your negotiations, you agree with the future cash flow projections, but you want to pay a lower price.

• What different discount rate will you suggest be used?
• Are you sure about that discount rate? Try doing a quick NPV model (using your existing template) and see what happens!
• The seller applied a 12% discount rate. With what logical reasoning will you try to convince the seller of a different discount rate?
• Which Principle of Finance does your logical reasoning rest on?