Ask Question
29 August, 05:14

Southern Tours is considering acquiring Holiday Vacations. Management believes Holiday Vacations can generate cash flows of $187,000, $220,000, and $245,000 over the next three years, respectively. After that time, they feel the business will be worthless. If the desired rate of return is 13.5 percent, what is the maximum Southern Tours should pay today to acquire Holiday Vacations?

+1
Answers (1)
  1. 29 August, 06:26
    0
    The answer is: the maximum amount Southern Tours should pay to acquire Holiday Vacations is $503,098

    Explanation:

    We have to calculate the present value of the 3 future cash flows of Holiday Vacations. After the third year, Holiday Vacations will shut down, so no more cash flows are expected.

    Cash flow year 1 = 187,000

    Cash flow year 2 = 220,000

    Cash flow year 3 = 245,000

    We can use an excel spreadsheet to calculate the present value, but since the operations are quite simple, we can also do them by ourselves.

    PV = (187,000 / 1.135) + (220,000 / 1.135²) + (245,000 / 1.135³) = $164,758 + $170,778 + $167,563 = $503,098
Know the Answer?
Not Sure About the Answer?
Find an answer to your question ✅ “Southern Tours is considering acquiring Holiday Vacations. Management believes Holiday Vacations can generate cash flows of $187,000, ...” in 📘 Business if you're in doubt about the correctness of the answers or there's no answer, then try to use the smart search and find answers to the similar questions.
Search for Other Answers