Marko plc is considering the purchase of ABC Co.Marko believes that ABC Co.can generate cash ﬂows of €5,000, €9,000, and €15,000 over the next three years, respectively.After that time, Marko feels ABC will be worthless.Marko has determined that a 14% rate of return is applicable to this potential purchase.What is Marko willing to pay today to buy ABC Co.?

Question

Quizplus · Accepted Answer

To calculate the present value, we use the formula:
PV = CF1/ (1+r)^1 + CF2/ (1+r)^2 + CF3/ (1+r)^3 + ... + CFn/ (1+r)^n

Substituting the given values, we get:
PV = 5000/ (1+0.14)^1 + 9000/ (1+0.14)^2 + 15000/ (1+0.14)^3
PV = €16,672.37

Therefore, Marko plc is willing to pay €21,435.74 today to buy ABC Co. (rounded to the nearest cent) which is option B.

Marko Plc Is Considering the Purchase of ABC Co