Scenario #2

You are the seller of a business, a bagel shop. You are negotiating with a potential buyer: The buyer is offering a purchase price of $500,000. The buyer calculated the NVP (business value) at $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 receive a higher price.

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