Southern Tours is considering acquiring Holiday Vacations.Management believes Holiday Vacations can generate cash flows of $187,000,$220,000,and $245,000 over the next three years,respectively.After that time,they feel the business will be worthless.Southern Tours has determined that a 13.5 percent rate of return is applicable to this potential acquisition.What is Southern Tours willing to pay today to acquire Holiday Vacations?

Question

Quizplus · Accepted Answer

The correct answer is A because the present value of the cash flows is $503,098. This is calculated by using the formula for the present value of an annuity, which is:PV = CF * [1 - (1 + r)^-n] / rwhere:PV is the present valueCF is the cash flowr is the rate of returnn is the number of yearsIn this case, the cash flows are $187,000, $220,000, and $245,000, the rate of return is 13.5%, and the number of years is 3. Plugging these values into the formula, we get:PV = $187,000 * [1 - (1 + 0.135)^-3] / 0.135+ $220,000 * [1 - (1 + 0.135)^-3] / 0.135+ $245,000 * [1 - (1 + 0.135)^-3] / 0.135= $503,098

Southern Tours Is Considering Acquiring Holiday Vacations