Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

You have just inherited $1,000,000 and are considering a number of investment options. Among the investment projects offered you there is a service/gas station whose

image text in transcribed
You have just inherited $1,000,000 and are considering a number of investment options. Among the investment projects offered you there is a service/gas station whose present owner is asking exactly $1,000,000 for it. The information he has provided you indicates that the sales and the expenses of the station have been relatively stable for the past 10 years. In fact, the present owner claims that he is so confident about the performance of the station that he is willing to provide the buyer with a money-back guarantee after three years. That is, after three years, if the buyer is not satisfied, he would buy the station back from him/her at exactly the same price. Based on the information given to you, you have estimated the annual costs and revenues of the station for the next three years as follows: Periods Revenue Cost Year 1 $720,000 $650,000 Year 2 $750,000 $640,000 Year 3 $800,000 $700,000 Assuming a risk-adjusted 4 percent discount (interest) rate, what price would you put on this service station? Would you buy it at the asking price? Explain. Note: This is a present-value valuation

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

Essentials Of Business Law

Authors: Jeffrey F Beatty, Susan S Samuelson

3rd Edition

0324537123, 9780324537123

More Books

Students also viewed these Economics questions