Please assist me with this question. Question 2 Jones is evaluating an offer for

Question

Please assist me with this question.

Question 2 Jones is evaluating an offer for his medical practice that will allow him to retire five years early. He received an offer of R650,000 for his practice and he can invest this amount in an account eaming 10 percent per year, compounded annually If the practice is expected to generate the 5 Marks following cash flows, advise Jones if he should accept this offer or not and retire now. Amount (in Rands) 160,000 160,000 130,000 130,000 100,000 End of Year 3

Explanation / Answer

Accept the offer

Working:

If the offer price is more than present value of annual cash flows,it is acceptable otherwise not. Present Value of annual cash flows is calculated as follows: Year Cash flows Discount factor Present Value 1 $       1,60,000 0.909091 $       1,45,455 2           1,60,000 0.826446           1,32,231 3           1,30,000 0.751315               97,671 4           1,30,000 0.683013               88,792 5           1,00,000 0.620921               62,092 Total           5,26,241 As per the above calculation, offer value is more than present value of annual cash flows for 5 years. So, it is better to accept the offer.

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