You have been approached by Mr johns who is considering purchasing a supermarket as a going concern, for an investment expert advice. you have gathered the following details about the supermarket.

a. Current operating cash flows are at $70000.00 per annum, and expected to grow at a rapid growth rate of 20% per annum, for three years.

b. After, the three years, the growth rate will level off to 5% per annum due to intensification of competition.

c. Beta for supermarket across the country ranges from 0.8 to 1.40, however an equity beta of 1.2 is considered appropriate for the supermarket, and Mr Johns has no intention to leverage his investment.

d. The rate of return on government bond averages 3%, and the market risk premium is 10%.

REQUIRED

1. If the current owner is selling the supermarket for $850000.00, should he purchase it? Explain.

2. State five limitations of the evaluation model you have used