Westover Industries is considering purchasing the Eastward Co. Westover believes that Eastward can generate cash flows of $21,000, $17,000, and $10,000 over the next three years, respectively. After that time, Westover feels the Eastward Co. will be worthless. Westover has determined that a 16% rate of return is applicable to this potential purchase. What is the maximum amount Westover should pay to acquire the Eastward Co.?

Question

Quizplus · Accepted Answer

The maximum amount Westover should pay is the present value of the future cash flows. Using a 16% discount rate, the present value is calculated as follows: PV = $21,000/(1+0.16)^1 + $17,000/(1+0.16)^2 + $10,000/(1+0.16)^3 = $18,103.45 + $12,629.31 + $6,411.03 = $37,143.79.

Westover Industries Is Considering Purchasing the Eastward Co