Problem
The owner of a rival business called Lelong Store is planning to emigrate overseas. He is prepared to sell his business for $1.5 million. Lelong Store has 5 outlets and a cost structure that is very similar to XYZ. The owner has projected annual sales over the next 7 years to be $2.3m, $2.4m, $2.5m, $2.55m, $2.6m, $2.62m and $2.65m, respectively.
XYZ has accumulated huge cash reserves over the years and its CEO is interested to expand his business by acquiring Lelong Store. For investment purposes, XYZ uses a time horizon of 7 years and requires the Return on Investment (ROI) of the intended acquisition to be equivalent or better than XYZ's own business ROI.
Create a model to analyse whether it is viable for XYZ to buy over Lelong Store. State any assumption(s) used by your model.
Use your model to make a recommendation to the CEO of XYZ. Justify your recommendation quantitatively.