Company annual revenue is $20k a year.
Equipment for the company is valued at $30k.
Takes about 8 hours of work a month. For around $10k I can completely automate the process and have no more work but still receive the income.
I have an offer for $80k.
Should I? A. Sell B. Hold C. Automate and hold onto that sweet sweet 100% passive income forever passing it to my children’s children’s children
Thank you 🙏
Edit: This companies revenue scales with inflation and its profit margin is set in stone.
No, this is wrong.
I get that a sum of money today is worth more now than the same sum of money at a later date. But you’re neglecting that this is essentially a perpetuity and are considering the wrong values. You have to calculate the present value of the expected cash flows to correctly value that stream of income against a lump sum of $80k today.
In perpetuity, the $1700 a month is worth somewhere between ~$102k-170k in today’s dollars, depending on the discount rate selected. A typical discount rate for a small business is between 12-20%.
That’s making a ton of assumptions, including that the cash flow will last forever, but I think it’s difficult to say that $80k is better now than continuing to operate the business and funneling that cash into some other investments that yield a decent rate of return.
A simpler comparison, which you could do for yourself, is to open up a spreadsheet and see what 5% interest does to 80k a year with no additional cash added to the investment over time compared to 20.4k a year every year. Somewhere around year 5, the $1700 a month compounded at 5% annually exceeds the value of 80k growing at the same rate. Note also that 5% is a relatively conservative rate of return.