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Marko, Inc., is considering the purchase of ABC Co. Marko believes that ABC Co. can generate...

Marko, Inc., is considering the purchase of ABC Co. Marko believes that ABC Co. can generate cash flows of $5,700, $10,700, and $16,900 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 11 percent is applicable to this potential purchase. What is Marko willing to pay today to buy ABC Co.?

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Answer #1

Answer:

Maximum value Marko will be willing to pay today to buy ABC Co. is the present value of the cash flows discounted at the rate of return he expects.

Present Value = Year 1 Cash flow / (1 + Rate of Return) + Year 2 Cash flow / (1 + Rate of Return) 2 + Year 3 Cash flow / (1 + Rate of Return) 3

= 5700 / (1 + 11%) + 10700 / (1 +11%)2 + 16900 / (1 + 11%) 3

= $26,176.62

Present value = $26,176.62

Maximum value Marko will be willing to pay today to buy ABC Co = $26,176.62.

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