You own a business which generates $200,000 in profit per year. Someone has offered to buy it from you. Based on a 5 year projection and belief that you could earn 9% annually if you had the money today, how much do you believe the business is worth today?

a. $700,000.00

b. $777, 930.25

c. $440,000.00

d. $536, 522.43

option (b) $777,930.25

Explanation:

Data provided in the question:

Profit per year = $200,000

Time = 5 years

Return, r = 9% = 0.09

Now,

Worth of business = ∑ (Cash flow * Present value factor)

also,

Present value factor = (1 + r) ⁻ⁿ

here,

n is the year of cash flow

Thus,

Year Cash Flows Present value factor Present value of cash flow

0 0 1 0

1 200000 0.917 $183,486.24

2 200000 0.842 $168,336

3 200000 0.772 $154,436.70

4 200000 0.708 $141,685.04

5 200000 0.65 $129,986.28

Hence,

The business worth today is

= $183,486.24 + $168,336 + $154,436.70 + $141,685.04 + $129,986.28

= $777,930.25

Hence,

The answer is option (b) $777,930.25