You are considering the purchase of a small business, Revive Consulting Limited.  This company currently earns after-tax cash flow of $350,000 per year. On the basis of a review of similar risk investment opportunities, you must earn a 11% rate of return on the proposed purchase.  What price should you pay for Revive Consulting Limited if the after-tax cash flows are expected to grow at an annual rate of 5% for the first two years, followed by a constant annual rate of 8% from year 3 onwards?

J&K Company Limited is considering replacing its current machine with a more technologically advanced machine for the company's use.  The company feels that by estimating and analyzing its cash flows it could make a more rational decision about this large purchase.  The cash flow estimates for the machine purchase are as follows: 

Purchase Price of New Machine	$20,500,000
Installation Cost	$350,000
Tax Rate	20%
Estimated Receipts from Selling New Machine in 5 years	$15,000,000
Current Book Value of Existing Machine	$13,000,000
Estimated Receipts from Selling existing machine today	$13,500,000
Estimated Receipts from selling existing machine in 5 years	$10,000,000
Accumulated Depreciation on new machine in 5 years	$5,000,000
Accumulated Depreciation on existing machine in 5 years	$4,000,000

 

a. Calculate J&K Company's After Tax Proceeds from Sale of Existing Asset today. 

b. Calculate J&K's Initial Investment

c. Calculate J&K's profit/loss from the sale of the existing machine in 5 years

d. Calculate J&K's Terminal Cash Flow

 You plan to retire in exactly 20 years.  Your goal is to create a fund that will allow you to receive $120,000 at the end of each year for the 15 years between retirement and your expected death (health studies have found that most people die 15 years after retirement).  You expect to earn 1% annual interest per year during the 15-year retirement period. How large a fund will you need, when you retire, to ensure you receive $120,000 each year for 15-years