Andrew's parents have been operating a fish-ball stand in Mongkok for more than 30 years. They plane to retire right after their 65th birthday (they both have just celebrated their 62th birthday) and are considering selling the business to enjoy their retirement. A friend of Andrew's has offered to buy the business from his parents for $3,500,000 as and when they wish to sell it (Andrew consider your friend a man of honor and will keep his offer open as made). Your parents cost of capital is 1% per month and they are considering two alrernative:

i) sell the business now or

ii) operate the business for three more years and they sell it to Andrew's friend (This would require an investment of $100,000 on supplies and labor every month (to be paid at the beginning of each month) and would earn (create a cash inflow of ) $300,000 every month for the next three years (to be received at the end of each month)

question:

1) Andrew's parents have expressed concern that they might get bored if retiring too soon. As a solution, you propose to keep operating the business for three more years on an afternoon-only basis. This would require an investment of $70,000 on supplies and labor, to be paid at the beginning of each month. How much earnings (cash inflows) are required to make this arrangement as valuable as alternative (ii) ABOVE?

2) If your mother really enjoys a ''busy life'' rather than a ''retirement-like life'', how does her preference affect the NPV of alternative (i) And through what channel?

Answer rating: 100% (QA)

To determine the amount of earnings required to make the alternative of operating the business on an ... View the full answer