Homework SourseSuppose you are considering the purchase of an established b
Suppose you are considering the purchase of an established business that has the expected profit stream noted below. If want a 20% return on you investment, what is the maximum amount you should pay for the property? (Show you work)
Year 1
Year 2
Year 3
Year 4
Year 5
$50,000
$51,000
$54,000
$57,000
$60,000
| Year 1 | Year 2 | Year 3 | Year 4 | Year 5 |
| $50,000 | $51,000 | $54,000 | $57,000 | $60,000 |
Solution
Assume there is no Time Value of Money.
ROI = Profits/ Total Investment
Sum of total profits = $ 272000
Therefore using the formula:
Investment = 272000/0.2 = $ 1,360,000
