Question

Marko, Inc. is considering the purchase of ABC Co. Marko believes that ABC Co. can generate cash flows of $5,000, $9,000, and $15,000 over the next three years, respectively. After that time, Marko feels ABC will be worthless. Marko has determined that a 14% rate of return is applicable to this potential purchase. What is Marko willing to pay today to buy ABC Co.

Answer 1

Answer:

$21,435.74

Explanation:

Marko will pay as much as the discounted present value of the cash flow:

$\frac{Maturity}{(1 + rate)^{time} } = PV$  

Maturity  $5,000.00

time  1.00

rate  0.14000

$\frac{5000}{(1 + 0.14)^{1} } = PV$  

PV   4,385.9649

$\frac{Maturity}{(1 + rate)^{time} } = PV$  

Maturity  $9,000.00

time  2.00

rate  0.14000

$\frac{9000}{(1 + 0.14)^{2} } = PV$  

PV   6,925.2078

$\frac{Maturity}{(1 + rate)^{time} } = PV$  

Maturity  $15,000.00

time  3.00

rate  0.14000

$\frac{15000}{(1 + 0.14)^{3} } = PV$  

PV   10,124.5727

We add them together and get the total price for ABC Co

$\left[\begin{array}{ccc}#&Cashflow&Discounted\\&&\\1&5000&4385.96\\2&9000&6925.21\\3&15000&10124.57\\&total&21435.74\\\end{array}\right]$