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 of the cash flows, we can use the formula:

PV = CF1 / (1 + r)^1 + CF2 / (1 + r)^2 + CF3 / (1 + r)^3

where PV is the present value, CF is the cash flow for each year, r is the discount rate (14%), and the number represents the year.

Plugging in the numbers, we get:

PV = 5,000 / (1 + 0.14)^1 + 9,000 / (1 + 0.14)^2 + 15,000 / (1 + 0.14)^3 
PV = 4,385.97 + 7,139.81 + 9,910.96 
PV = 21,435.74

Therefore, Marko is willing to pay £21,435.74 today to buy ABC Co. The correct answer is B.

Marko Plc Is Considering the Purchase of ABC Co