Marko, Inc., is considering the purchase of ABC Co. Marko believes that ABC Co. can generate cash flows of $5,200, $10,200, and $16,400 over the next three years, respectively. After that time, they feel the business will be worthless. Marko has determined that a rate of return of 14 percent is applicable to this potential purchase. What is Marko willing to pay today to buy ABC Co.

Question

Lilliana Barrett

Business

19 May, 07:19

Marko, Inc., is considering the purchase of ABC Co. Marko believes that ABC Co. can generate cash flows of $5,200, $10,200, and $16,400 over the next three years, respectively. After that time, they feel the business will be worthless. Marko has determined that a rate of return of 14 percent is applicable to this potential purchase. What is Marko willing to pay today to buy ABC Co.

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Answers (1)

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Kendrick Shields · Answer 1

= $23,479.51

Explanation:

The value of the investment is the sum of the present value of the future cash flows discounted at 14%.

PV

Year 1 5,200 * 1.14^ (-1) = 4,561.40

Year 2 10,200 * 1.14^ (-2) = 7,848.57

Year 3 16,400 * 1.14^ (-3) = 11,069.53

Total amount willing to be paid

= 4,561.40 + 7,848.57 + 11,069.53

= $23,479.51