The annual after-tax free cash flow from the acquisition by Pacific Care of Universal Health is projected to be $12 million. These flows are expected to continue for 20 years. No value is placed on cash flows beyond 20 years. If the appropriate risk-adjusted discount rate for the merged firm is 15%, what is the maximum amount Pacific Care should pay to acquire Universal Health?

Question

Quizplus · Accepted Answer

The maximum amount Pacific Care should pay is the present value of the projected cash flows. Using the formula for the present value of an annuity, PV = C * [(1 - (1 + r)^-n) / r], where C is the annual cash flow ($12 million), r is the discount rate (15% or 0.15), and n is the number of years (20), the calculation gives approximately $75,108,000.

The Annual After-Tax Free Cash Flow from the Acquisition by Pacific