Business Plan Discount Rate

Business Plan. Discount Rate.

PART ONE:

A.

When discount rate is 6%

PV = future value / (1+r)t

Where r is the discount rate and t is time in years

PV = 5,000 / (1+0.06)1

PV = 4,716.98

When the discount rate is 5%

PV = 5,000 / (1+0.05)1

PV = 4,761.90

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Business Plan. Discount Rate.

B.

Account A $3,000.00, one year, 4% interest rate

PV = 3,000 / (1+0.04)1

PV = 2,884.62

Account B $8,600.00, two years. Both accounts earn 4% interest

PV = 8,600 / (1+0.04)2

PV = 7,951.18

C.

We use the formula:

PV = cash inflow / (1+r)t

Where r is the discount rate and t is time in years

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Business Plan. Discount Rate.

Discount rate of 8%

year

rate

present  value

1

32,000,000

8%

29,629,629.63

2

62,000,000

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Business Plan. Discount Rate.

8%

53,155,006.86

3

89,000,000

8%

70,651,069.45

Discount rate of 6%

year

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Business Plan. Discount Rate.

rate

present  value

1

32,000,000

6%

30,188,679.25

2

62,000,000

6%

55,179,779.28

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Business Plan. Discount Rate.

3

89,000,000

6%

74,726,116.19

Discount rate of 4%

year

rate

present  value

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Business Plan. Discount Rate.

1

32,000,000

4%

30,769,230.77

2

62,000,000

4%

57,322,485.21

3

89,000,000

4%

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Business Plan. Discount Rate.

79,120,675.92

From the above analysis with different discount rate it is evident that the lower the discount rate then the higher is the present value, the higher the discount rate then the lower the present value for the years, this means that an investor will require less amount when the discount rate is higher and will be required to invest higher amounts when the discount rate is low.

Part II:

Sample business plans:

We have three business plans which include the Ice Dreams, Wagner and Associates Realty plan and the Interstate Travel Center plan, the Ice Dreams plan is an analysis of possible business involving the sale of soft drinks, investment required is 10,000 and expected cash flow for the three years is 24,000, 36,000 and 50,000. the current interest rate assumed is 13.50% and 42,000 capital will be acquired through a loan.

Wagner and Associates Realty plan is an analysis of real estate business that require 60,000 capital and an two investor will invest 20,000 and the remaining 10,000 will be financed through a loan, the assumed interest rate is 10 %. The market size is expected to have a 3% growth over the years and the net worth of the business is expected to be 193,211.

The Interstate Travel Center plan is a business plan which requires 2.75 million capital, 2.5 million capital will be financed through a loan and 250,000 is what the investor will invest. The market is expected to have an average of 3.63% growth and the salary cost is expected to be

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Business Plan. Discount Rate.

481,672 each year, however the profits are expected to be high.

The business plan with the highest risk is the Interstate Travel Center plan business plan, the first reason why this contains the highest risk is that it requires the investor to invest 250,000 which is a high amount compared to the other two plans. The plan with the lowest risk is the Ice Dreams plan because it requires only 10,000 investments.

On present value and returns it is evident that the present value for the Ice Dreams plan it is evident that cash flow for the three years is 24,000, 36,000 and 50,000 and the expected discount rate is 13.5%, this means that the present value of the investment is as follows:

year

rate

present  value

0

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Business Plan. Discount Rate.

-10,000

1

24,000

13.5%

21,145.37

2

36,000

13.5%

27,945.43

3

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Business Plan. Discount Rate.

50,000

13.5%

34,196.56

From the above calculations summarizes the present value of the business plan, the expected discount rate is 13.5% and that the present value shows that this is good investment option.

For the interstate travel plan the investor will be required to raise 250,000, this plan shows that there are high expenses involved and the plan does not provide the expected cash flow, therefore an investor should not engage in such an activity worth very little information regarding expected profits and returns.

References:

Sample business plan (2008) ICE dream business plan, retrieved on 25th September, available

at www.bplans.com/s pv/3127/1.cfm#1010000

Sample business plan (2008) J Wagner and Associates Realty plan, retrieved on 25th

September, available at

http://www.bplans.com/Sample_Business_Plans/Real_Estate_Business_Plans/Real_Estate_B

rokerage_Business_Plan/executive_summary_fc.cfm

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Business Plan. Discount Rate.

www.bplans.com/spv/3136/index.cfm?affiliate=sbm

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