Question

Marko, Inc. is considering the purchase of ABC Co. Marko believes that ABC Co. can generate cash flows of $6,600, $11,600, and $17,800 over the next three years, respectively. After that time, they feel the business will be worthless. Marko has determined that a rate of return of 13 percent is applicable to this potential purchase. What is Marko willing to pay today to buy ABC Co.?

Answer 1

Answer:

$27,261.50

Explanation:

In order to determine how much Marko willing to pay today to buy ABC Co., the present value of the cash flows has to be calculated.

Present value is the sum of discounted cash flows.

Present value can be calculated using a financial calculator

Cash flow in year one = $6,600

Cash flow in year two = $11,600

Cash flow in year three = $17,800

I = 13%

Present value = $27,261.50

To find the NPV using a BA2 Plus financial calacutor:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. After inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.

3. Press compute

I hope my answer helps you