The owner of the rival business agrees to sell to you. He will take payment one of three different ways. Using the information below, calculate which payment option would make more financial sense to you and state which you should accept. Use formulas not tables, and show working. Make a definite statement as to which option should be chosen. (5 marks) Hint: You need to use your skills calculating the PV of future cash flows. Option 1: An upfront Payment of $100,000 and a single fixed payment in 1 year of $35,000. Option 2: An upfront Payment of $20,000, followed by further payments of $10,000 at the end of each month for the following 12 months. Option 3. No upfront Payment. 50% of profit for the next two years, payable semi-annually as the profits are earned. The expectations that you have for the new business and the financial economy are as follows: Expected profits for the purchased business will be $140,000 in year 1, and $160,000 in year 2. Assume profits are earned in a consistent manner throughout the year. Expected annualised interest rates are flat from cash out for 1 year at 5% and then rise to 6% at 1.5 years and to 7% for the 2 year. 2.

. ANSWER BY CHEGG: 1. As the profits are earned consistently throughout the year, let us assume that the profits are earned semiannually. $70000 after 6 and 12 months and $80000 after 18 and 24 months. Let all interest rates be also compounded semiannually PV of expected profit = 70000/1.025+70000/1.025^2+80000/1.03^3+ 80000/1.035^4 = $277846.40 The option which has the lowest PV should be chosen Option 1 PV = $100000+$35000/1.025^2 = $133,313.50 Option 2 Interest rate per month = (1+5%/2)^(1/6)-1 = 0.004123915 PV = 20000+10000/0.004123915*(1-1/1.004123915^12) = $136,844.31 Option 3 Half profits i.e. $35000 after 6 and 12 months and $40000 after 18 and 24 months. PV = 35000/1.025+35000/1.025^2+40000/1.03^3+ 40000/1.035^4= $138,923.20 OPTION 1 is the best as the present value of amount paid is the least

PART B ANSWER REQUIRED: REQUIREMENT IS FOLLOW:

QUESTION PART B : Think about the scenario described in question 6 and your eventual answer. Explain the risks that are faced by the Seller of the business in accepting your offer. In particular, use your understanding of Agency Risk and mention how Ethical behaviours in business might apply here. Hint: The seller is relying on the new owner (you) to