# Evaluating the potential purchase of a small business currently generating

## Question: You are evaluating the potential purchase of a small…

You are evaluating the potential purchase of a small business currently generating $46,000 ofafter-tax cash flow (D0 equals=$46,000). On the basis of a review ofsimilar-risk investmentopportunities, you must earn a rate of return of 22% on the proposed purchase. Because you are relatively uncertain about future cashflows, you decide to estimate thefirm’s value using two possible assumptions about the growth rate of cash flows.

a. What is the firm’s value if cash flows are expected to grow at an annual rate of 0% from now toinfinity?

b. What is the firm’s value if cash flows are expected to grow at a constant rate of 6% from now toinfinity?

c. What is the firm’s value if cash flows are expected to grow at an annual rate of 11% for the first 2years, followed by a constant?

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a. The firm’s value if cash flows are expected to grow at an annual rate of 0% from now to infinity is (Round to the nearestdollar.)

b. The firm’s value if cash flows are expected to grow at a constant rate of 6% from now to infinity is (Round to the nearestdollar.)

c. The firm’s value if cash flows are expected to grow at an annual rate of 11% for the first 2years, followed by a constant annual rate of 6% from year 3 to infinity is (Round to the nearestdollar.)

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