Question

Marko, Inc., is considering the purchase of ABC Co. Marko believes that ABC Co. can generate cash flows of $6,500, $11,500, and $17,700 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 12 percent is applicable to this potential purchase. What is Marko willing to pay today to buy ABC Co.? Multiple Choice $27,569.81 $35,700.00 $29,109.63 $38,734.50 $25,415.81

Answer 1

Answer: $27569.81

Explanation:

Based on the information given in the question, the amount that Marko is willing to pay today to buy ABC Co. goes thus:

For Year 1:

Discount factor = 12%

12% at Year 1 = 0.892857

Amount = $6500

PV = $6500 × 0.892857

= $5803.57

For Year 2:

Discount factor = 12%

12% at Year 2 = 0.797194

Amount = $11500

PV = $11500 × 0.797194

= $9167.73

For Year 3:

Discount factor = 12%

12% at Year 3 = 0.71178

Amount = $17700

PV = $17700 × 0.71178

= $12,598.51

The amount that Marko is willing to pay today to buy ABC Co will be:

= $5803.57 + $9167.73 + $12,598.51

= $27569.81