Final answer:
To calculate the sale or residual value of the company, multiply the net cash flow for year 5 by the P/E ratio, and then apply the discount rate to find the present value at the end of year 5, resulting in a calculation closest to option B.
Step-by-step explanation:
The question involves computing the sale or residual value of a company based on a given Price/Earnings (P/E) ratio, net cash flow for year 5, and a discount rate. To find the sale or residual value of the company, we need to capitalize the net cash flow for year 5 using the P/E ratio. Since the company's net cash flow for year 5 is $250,000 and the P/E ratio is 10, we multiply them to find the company's theoretical market value before discounting: $250,000 x 10 = $2,500,000.
Next, we apply the discount rate to this future value to determine its present value. The present value formula is PV = FV / (1 + r)^n, where PV is the present value, FV is the future value, r is the discount rate (expressed as a decimal), and n is the number of periods. However, since the P/E ratio already gives us the present value multiple, we only need to adjust it for the discount rate for one period, as we're considering the value at the end of year 5. Therefore, the calculation is $2,500,000 / (1 + 0.30) = $1,923,076.92, which is closest to option B, $1,923,077 when rounded.
Given the provided options, none matches this calculation precisely, suggesting a possible error in the question or answer choices. To adhere strictly to the options given, and assuming the calculation above is conceptually correct, option B appears to be the closest match since it is the one that is closest to the calculated value of $1,923,076.92.