Question

Q5. You plan to purchase a taco bar from Daddy Yankee. The taco bar's forecasted future cash flows are: 1$100K at t-2, I$140K at t-4, and 1$125K at t-7. The uncertainty surrounding these future CFs is such that a 5.40% rate of return is appropriate for valuation.(a) What would be a fair price to pay Daddy Yankee today?(b) If you wanted to try to "make" I$50K on this deal, what price should you try to pay to Daddy Yankee?

Answer 1

a) Fair value to pay to daddy yankee today is the present value of the expected future cashflows.

As per the forecast , taco bar's forecasted future cash flow are as follows:

at (t=2)= $100K

at (t=4)= $140K

at (t=7)= $125K

Rate of return =5.40%

Considering the above facts, the present value of the above-mentioned cash flow

Hence fair price to pay to Daddy yankee today is $289.96K

b) In case if you have to make $50K out of this deal , then you should pay $239.96K(i.e $289.96K-$50K) to daddy yankee