Coming Up Roses has grown into a very successful business and you have just received an offer from someone to purchase the business from you for $1.2 million. The potential buyer has offered you $400,000 at the time of sale, $600,000 at the end of the growing season, in 6 months, and the balance, $200,000 in 1.5 years from now. What is the present value of this offer if you could invest at 6% compounding monthly?

Coming Up Roses has grown into a very successful business and you have just received an offer from someone to purchase the business from you for $1.2 million. The potential buyer has offered you $400,000 at the time of sale, $600,000 at the end of the growing season, in 6 months, and the balance, $200,000 in 1.5 years from now. What is the present value of this offer if you could invest at 6% compounding monthly?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter5: The Time Value Of Money

Section: Chapter Questions

Problem 22P

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Question

What is the present value of this offer if you could invest at 6% compounding monthly?

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Expert Solution

Step 1

Present Value of the cash flows can be calculated using the interest rate of 6% which is compounded monthly (6%/12 = 0.5%).

A
B
C
D
PV
Formula
188 Period
Cash Flow
4,00,000.000000000B189
5,82,310.846781795 B190/ (1+0.06/12)(12*0.5)
1,82,827.231976385B191/ (1+0.06/12) (12*1.5)
11,65,138.078758180SUM(C189:C191)
4,00,000.00 S
6,00,000.00 S
2,00,000.00 $
189
190 6 months (0.5)
1.5 S
191
$
Present Value of the offer
192

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