Determining Value

Let's say that you want to start a business, and you decide to open a restaurant. You go out and buy a building, buy all the kitchen equipment, tables and chairs that you need, buy your supplies and hire your cooks, servers, etc. You advertise and open your doors.

Let's say that:

• You spend $500,000 buying the building and the equipment.
• In the first year, you spend $250,000 on supplies, food and the payroll for your employees.
• At the end of your first year, you add up all of the money you have received from customers and find that your total income is $300,000.

Since you have made $300,000 and paid out the $250,000 for expenses, your net profit is:

$300,000 (income) - $250,000 (expense) = $50,000 (profit)

At the end of the second year, you bring in $325,000 and your expenses remain­ the same, for a net profit of $75,000. At this point, you decide that you want to sell the business. What is it worth?