Roxanne invested $520,000 in a new business 3 years ago. The business was expect
ID: 2641357 • Letter: R
Question
Roxanne invested $520,000 in a new business 3 years ago. The business was expected to bring in $8,000 each month for the next 25 years (in excess of all costs). The annual cost of capital (or interest rate) for this type of business was 4% with monthly compounding. What is the value of the business today? (Enter just the number in dollars without the $ sign or a comma and round off decimals.) Hint:Value is always based on the future cash flows. You can refer to NPV, IRR, Payback or any other formulas you think is suitable
Explanation / Answer
Calculation of Future Value of Annuity:
FV = PMT / i [ (1 + i) n - 1]
FV = 8,000 / 0.0033 [ (1 + 0.0033) 12 x 3 - 1]
FV = 305,453
So, the value of Firm is 305,453
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