The annual after-tax free cash flow from the acquisition by Pacific Care of Universal Health is projected to be $12 million. These flows are expected to continue for 20 years. No value is placed on cash flows beyond 20 years. If the appropriate risk-adjusted discount rate is 15 percent, what is the maximum amount Pacific Care should pay to acquire Universal Health?

Question

Quizplus · Accepted Answer

To determine the maximum amount Pacific Care should pay, we need to calculate the present value of the cash flows. We can use the formula:

PV = CF / (1+r)^n

Where: 
CF = cash flow 
r = discount rate 
n = number of periods

In this case, CF is $12 million, r is 15%, and n is 20.

PV = $12 million / (1+0.15)^20 
PV = $75,111,600

Therefore, the maximum amount Pacific Care should pay to acquire Universal Health is $75,111,600.

The Annual After-Tax Free Cash Flow from the Acquisition by Pacific