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Company ABC has been offered to buy an existing manufacturing plant from a neighbouring company. It...

Company ABC has been offered to buy an existing manufacturing plant from a neighbouring company. It is estimated that the existing plant will generate a net cash flow of R2.5 million per year for the next ten years. The estimated selling price of the plant after ten years is R15 million. What is the maximum amount that ABC should be willing to pay for this investment if its relative low risk justifies a required rate of return of only 10 percent (10%) per annum? (Round off to the nearest Rand).

(a) R30 361 417

(b) R15 361 417

(c) R21 144 567

(d) R40 000 000

(e) None of the above

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Answer #1

Ans) c) R21144567

Statement shoiwng present value of future cash flow

Year Cash flow PVIF @ 10% PV
A B A x B
1 2500000 0.9091 2272727
2 2500000 0.8264 2066116
3 2500000 0.7513 1878287
4 2500000 0.6830 1707534
5 2500000 0.6209 1552303
6 2500000 0.5645 1411185
7 2500000 0.5132 1282895
8 2500000 0.4665 1166268
9 2500000 0.4241 1060244
10 17500000 0.3855 6747008
Present value of future cash flow 21144567

The maximum amount that ABC should be willing to pay for this investment = present value of future cash flow = R21144567

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