need help please with nominal payback – discounted payback – net present value and IRR
You are the GM for Bicker, Slaughter, and Lynch law firm. There is an opportunity to buy out a small law firm that was just started by a young MBA/JD and you believe the firm can be grown and lucrative part of your firm.
With help from the finance leader, you have estimated the above benefit streams for this new division
You estimate that the purchase price for this firm would be $200,000 and that additional net working capital would be need in the amount of $60,000 in year 0, an additional $15,000 in year 2 and then $15,000 in year 5.
BSL usually spend about $275,000 per year in advertising. If you make this acquisition, advertising spending be increased by an incremental one time amount of $45,000 in year 0 to publicize the firm’s expansion.
Your finance leader has indicated that the firm has access to a credit line and could borrow the funds at a rate of 6%. He also mentions that when he runs project economics for capital budgeting, he recommends a standard 10% rate discount, but the one other time they looked at an acquisition of a smaller firm he used a 13% rate discount. You will want to select the most appropriate discount rate for this type of project.