The owner of a firm expects to make a profit of $12,000 for each of the...
The owner of a firm expects to make a profit of $12,000 for each of the next two years and to be able to sell the firm at the end of the second year for $30,000. The owner of the firm believes that the appropriate discount rate for the firm is 14 percent. Calculate the value of the firm.
Homework Answers
value of the firm means the present value of the cash flows.
Present value = A(P/A, i, n) + F(P/F, i, n)
= 12,000(P/A, 14%, 2) + 30,000(P/F, 14%, 2)
= 12,000(1.647) + 30,000(0.7695)
= 19,764 + 23,085
= $42,849
Thus, the value of the firm is $42,849
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