Question

Marko, Inc., is considering the purchase of ABC Co. Marko believes that ABC Co. can generate cash flows of $5,200, $10,200, and $16,400 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:

= $23,479.51

Explanation:

The value of the investment is the sum of the present value of the future cash flows discounted at 14%.

                                               PV

Year 1     5,200× 1.14^(-1) =  4,561.40

Year 2    10,200 × 1.14^(-2) =  7,848.57

Year 3    16,400 ×  1.14^(-3) =  11,069.53

Total amount willing to be paid

= 4,561.40 + 7,848.57 + 11,069.53

= $23,479.51