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 percent, what is the maximum Southern Tours should pay today to acquire 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:

The maximum Southern Tours could pay to acquire the Holiday Vacations is the present is the value of the inflows to be generated from the target company.

The present of the target business is $519,799.59  

Explanation:

That amount is the maximum that should be paid for the target business,depending on negotiation skills of Southern Tours' management.

A  lower price could be bargained,which better makes the investment more profitable.

Find attached spreadsheet for detailed computations.

Download xlsx