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.?

Question

Business

Braeden

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.?

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Answers (1)

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Davies · Answer 1

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