Mr.Zhu is selling his business for retirement.It is expected that the cash flows from his business in each of next 5 years will be $500,000.At the end of the 5 years,the residual value of the business is expected to be $8 million.Mr.Zhu has his expected rate of return of 12.0% .What could be the closest estimate to his "fair market value" (of similar business)at which he would be willing to sell his business?
A) $6.34 million
B) $6.00 million
C) $5.80 million
D) $6.50 million

Question

Quizplus · Accepted Answer

A) PV = PMT {[1-(1+i)^-5]/i} 500,000{[1 - (1.12)^-5]/.12 = 1,802,38 PV = PMT/(1+i)^N = 8,000,000/(1.12)⁵ = 4,539,415 Total value = 1,802,388 +4,539,415 = $6,341,803

MrZhu Is Selling His Business for Retirement