Question

Marko, Inc., is considering the purchase of ABC Co. Marko believes that ABC Co. can generate cash flows of $6,000, $11,000, and $17,200 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 14 percent is applicable to this potential purchase. What is Marko willing to pay today to buy ABC Co.?

Answer 1

Answer:

$ 25,336.81  

Explanation:

The maximum Marko would pay today is the present values of the future cash inflows of ABC Co discounted at the required rate of return of 14% as computed below:

Years  cash-flows           discount factor                present values

1            $6000                1/(1+14%)^1=0.87719         $ 5,263.16  

2           $11,000               1/(1+14%)^2=0.76947       $ 8,464.14  

3            $17,200              1/(1+14%)^3= 0.67497      $ 11,609.51  

Total present values                                                $25,336.81  

From a rational investor's point of view , the maximum Marko Inc. would pay for ABC Co is $ 25,336.81  which is the present worth of cash flows realizable from the business in future