Marko,Inc. 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 of the future cash flows, we can use the formula for the present value of an annuity:

PV = CF / (1 + r)^t

Where PV is the present value, CF is the cash flow, r is the rate of return, and t is the time period.

Using the given values, we get:

PV1 = 5000 / (1 + 0.14)^1 = 4385.96
PV2 = 9000 / (1 + 0.14)^2 = 6680.17
PV3 = 15000 / (1 + 0.14)^3 = 10469.25

Total PV = PV1 + PV2 + PV3 = 4385.96 + 6680.17 + 10469.25 = 21835.38

Therefore, Marko is willing to pay $21,435.74 today to buy ABC Co. (Option B).

Marko,Inc Is Considering the Purchase of ABC Co