How low can you go?
What is the floor value for a cash negative business? Net asset value, because you can sell the assets and recoup your initial investment? “That is a valid argument only when you have no interest in making money,” says REAG. “If you are in the business of making money you must severely discount the value of these assets for the fact that they are not income producing, are illiquid and come with an opportunity cost.”
If the purchased assets generate a return less than the buyer’s WACC, the assets will cost money rather than make it. How about disposal costs, carrying costs and the time it takes to convert these assets to cash? With risk, return, opportunity cost and asset marketability assessed together, one must consider what return is being offered to entice the purchase—if none, then the assets must be discounted. “If not, what entices the purchase of these assets? The opportunity to lose money each year?” Read the full article here, and send your comments to email@example.com.