Question

TL Enterprises (TLE) is considering purchasing DMM. DMM has expected cash flows of $42,800, $56,700, and $37,100 for the next 3 years, respectively. After that, the products DMM produces will be obsolete and thus DMM will be worthless. If TLE requires a return of 18 percent, what amount should they offer as a purchase price?

Multiple Choice

• $85,868.09

• $102,247.79

• $91,216.57

• $87,141.41

• $99,572.45

Answer 1

The maximum we can offer as purchase price is nothing but discounting the future Cash flows at 18%

Year	Cash flow	Disc@ 8%	Discounting factor @ 18%	DiscountedCash floows( Cash flows* Discounting fcactor)
1	$42,800.00	1/( 1.18)^1	0.847458	$36,271.19
2	$56,700.00	1/( 1.18)^2	0.718184	$40,721.06
3	$37,100.00	1/( 1.18)^3	0.608631	$22,580.21
		Total		$99,572.45

Hence the Purchae price we can offer is $ 99572.45. Hence option 5 is the Correct answer.