00:01
Hello students, here is a question.
00:02
Your neighborhood laundry mat is for sale and a friend is considered to invest in a business.
00:08
Your friend he asked your financial advice regarding the endeavor for business alone and no other assets.
00:15
The purchase price is 250 ,000 dollars.
00:18
The net cash flow for the project is 30 ,000 per year for the next 5 years.
00:22
The plan is borrow the money for this investment at 5%.
00:25
What is the net present value for the project? also, we need to calculate the payback period for the project.
00:32
He would evaluate this investment and what is the good price which purchase of this business.
00:36
So, this is our question.
00:37
Let us discuss the answer for this.
00:39
First, we need to calculate the present value of a cash flow for the next 5 years.
00:44
So, the pv we have to use the formula that pv is equal to cf divided by 1 plus r to the power n.
00:52
So, when p is the present value, cf is a cash flow and r is a discount rate and n is the number of years using the formula, we can calculate the present value.
01:02
So, to calculate the present value, we have to draft a table that pv1, pv2.
01:07
Here we have been asked for 5 years.
01:10
So, we have to write the pv for 5 years.
01:16
Then for the first year, it is 30 ,000.
01:20
For second year also, this 30 ,000.
01:23
Third year also 30 ,000.
01:24
Fourth is also 30 ,000 and fifth is also the 30 ,000 will be the cash flow into 1 plus 0 .05 to the power 1 into 1 plus 0 .05 to the power 2 and then for the third, it is 1 plus 0 .05 to the power 3 and for the fourth, it is 1 plus 0 .05 to the power 4 and fifth it is 1 plus 0 .05 to the power 5.
01:57
So, the values are, the pv values will be 28 ,571 .43 for the first year.
02:06
For the second year, it is 27 ,210 .88...