A company was just established with an investment of $5 million in stereo equipm

Question

A company was just established with an investment of $5 million in stereo equipment. They expect the company to generate $800,000 a year for the next 10 years, followed by $1 million a year for the following 10 years. If cost of capital is 15%, find the market value and book value of this company. A. market value=$9.0 million; book value=$5.0 million B. market value=$5.0 million; book value=$5.3 million C. market value=$5.3 million; book value=$5.0 million D. market value=$18.0 million; book value=$5.0 million

Explanation / Answer

C. market value=$5.3 million; book value=$5.0 million

Initial investment           5,000,000 generate              800,000 PVAF 10 yrs 15% 5.01876           4,015,008 10th year           1,000,000 5.01876 6.25933 PV factor                   1.241 PV of cashflow           1,240,570 Market value $5,255,578.00 Market value in million $5.3

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