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Sam wants to start a small commercial bakery to supply gourmet deserts to local restaurants. He believes that with his product line and his connections in the restaurant business, he can grow the business over the next five years into a profitable niche player in the pre-made food supply business. Sam projects the following cash flows (after any necessary reinvestment in the business):
Year 1 $250,000
Year 2 $500,000
Year 3 $750,000
Year 4 $1,000,000
Year 5 $1,250,000
Sam thinks the increase in profits will peak in about year six at $1.5 million, and that after that, they will grow at about 5% per year.
Sam is going to put up half the money and an investor associate is putting up the other half. This investor puts money into a lot of early stage companies, and he usually expects to make about 35% return.
Sam figures that once the business matures, he and the investor should only expect to make about 18% on the business, as that is similar to what some small publicly traded commercial bakeries make.
Using discounted cash flows (including the terminal value), what is the net present value of Sam’s business?
What is the present value of the perpetuity?
Given that you have 1,000 workers, what is the best allocation of workers between the two plants?
Which of the following is not an example of the use of a sinking fund?
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Carlsbad Corporation's sales are expected to increase from $5 million in 2016 to $6 million in 2017, or by 20%. Its assets totaled $5 million at the end of 2016. Carlsbad is at full capacity, so its assets must grow in proportion to projected sales.
Suppose you purchase a 30-year, zero-coupon bond with a yield to maturity of 6%. what is the internal rate of return of your investment?
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