Kasha Inc. is evaluating a merger with the following cash flows:
-Years 1 and 2 Incremental Cash Flows: $60 million each year
-Year 3 incremental cash flow: $70 million
-Discount rate = 9 percent
What is the most Kasha should pay for this merger?
A) $113.96 million
B) $158.96 million
C) $159.60 million
D) $190.00 million

Question

Quizplus · Accepted Answer

The present value of the cash flows is calculated as follows:  Year 1: $60 million / (1 + 0.09)^1 = $55.05 million  Year 2: $60 million / (1 + 0.09)^2 = $50.51 million  Year 3: $70 million / (1 + 0.09)^3 = $54.04 million  Total present value = $55.05 million + $50.51 million + $54.04 million = $159.60 million.

Kasha Inc Is Evaluating a Merger with the Following Cash Flows