Question

Marko, Inc. is considering the purchase of ABC Co. Marko believes that ABC Co. can generate cash flows of $5,300, $10,300, and $16,500 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 15 percent is applicable to this potential purchase. What is Marko willing to pay today to buy ABC Co.?

potential answers are:

$21,010.99

$32,100.00

$35,791.50

$24,910.35

$23,245.99

Answer 1

Answer

• Marko Inc. will be willing to pay the "Present Value of Future Benefits" that it will get in the Form of Cashflows by Purchasing ABC Co.
• So in our Question, Marko will be receiving 3years Cashflows of ABC Co.

? Marko Inc can Pay = Present Values of 3year Cashflows pf ABC Co.

= $5300 * PVF_{(at 15%,1^st year)} + $10300 * PVF_{(at 15%,2^nd year)} + $16500 * PVF_{(at 15%,3^rd year)}

= (5300 * 0.8695652) + (10300 * 0.75614366) + (16500 * 0.65751623)

= $ 23245.99

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