Southern Tours is considering acquiring Holiday Vacations. Management believes Holiday Vacations can generate cash flows of $218,000, $224,000, and $238,000 over the next three years, respectively. After that time, they feel the business will be worthless. If the desired rate of return is 14.5 percent, what is the maximum Southern Tours should pay today to acquire Holiday Vacations?

Question

Quizplus · Accepted Answer

The correct answer is A. The maximum Southern Tours should pay today to acquire Holiday Vacations is $519,799.59. This is calculated using the present value of the cash flows, which is $519,799.59. The present value is calculated by dividing the future cash flows by the discount factor, which is 1 + the desired rate of return. In this case, the desired rate of return is 14.5 percent, so the discount factor is 1.145.

Southern Tours Is Considering Acquiring Holiday Vacations