TH Manufacturers expects to generate cash flows of $129,600 for the next two years.At the end of the two years the business will be sold for an estimated $3.2 million.What is the value of this business at a discount rate of 14 percent?

Question

Quizplus · Accepted Answer

We can use the formula for calculating the present value of cash flows and the future sale price.

PV = CF1 / (1+r)^1 + CF2 / (1+r)^2 + Terminal Value / (1+r)^n
PV = 129,600 / (1+0.14)^1 + 129,600 / (1+0.14)^2 + 3,200,000 / (1+0.14)^2
PV = 108,421.05 + 87,438.60 + 2,479,843.26
PV = 2,675,703.91

Therefore, the value of the business at a discount rate of 14 percent is $2,675,703. The answer is C.

TH Manufacturers Expects to Generate Cash Flows of $129,600 for the Next