Ask Question
26 April, 04:36

Marko, Inc., is considering the purchase of ABC Co. Marko believes that ABC Co. can generate cash flows of $5,500, $10,500, and $16,700 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 13 percent is applicable to this potential purchase. What is Marko willing to pay today to buy ABC Co.?

+3
Answers (1)
  1. 26 April, 05:16
    0
    Marko is willing to pay $24,664 today to buy ABC Co.

    Explanation:

    Present values of all the cash flows will decide the today's value of the investment.

    Present values

    Required rate of return = CF (1 + r) ^-n

    First year = $5,500 x (1 + 0.13) ^-1 = $5,500 x (1.13) ^-1 = $4,867

    Second year = $10,500 x (1 + 0.13) ^-2 = $10,500 x (1.13) ^-2 = $8,223

    Third year = $16,700 x (1 + 0.13) - 3 = $16,700 x (1.13) - 3 = $11,574

    Net present value of all cash flows = $4,867 + $8,223 + $11,574 = $24,664
Know the Answer?
Not Sure About the Answer?
Find an answer to your question ✅ “Marko, Inc., is considering the purchase of ABC Co. Marko believes that ABC Co. can generate cash flows of $5,500, $10,500, and $16,700 ...” 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