Question

Southern Tours is considering acquiring Holiday Vacations. Management believes Holiday Vacations can generate cash flows of $218,000, $224,000, and $238,000 over the next three years, respectively. After that time, they feel the business will be worthless. If the desired rate of return is 14.5%, what is the maximum Southern Tours should pay today for Holiday Vacations?
A) 519,799.59

B) 538,615.08

C) 545,920.61

D) 595.170.53

E) 538,407.71

Answer 1

Answer:

Option (A)  $519,799.59

Explanation:

The amount Southern Tours should pay today for Holiday Vacations

= ∑Present value of the cash flow

also,

Present value of the cash flow = Cash flow × PVF

Here,

PVF =[ 1 + r]⁻ⁿ

n is the year

r is the rate of return = 14.5% = 0.145

Thus,

Year                 cash flow             PVF            Present value of the cash flow

1                      $218,000            0.873362          $190,393.0131

2                     $224,000           0.762762          $170,858.6793

3                     $238,000           0.666168          $158,547.9011

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The amount Southern Tours should pay today for Holiday Vacations

= $190,393.0131 + $170,858.6793 + $158,547.9011

= $519,799.59

Hence,

Option (A)  $519,799.59