Question

Marko, Inc., is considering the purchase of ABC Co. Marko believes that ABC Co. can generate cash flows of $5,700, $10,700, and $16,900 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 11 percent is applicable to this potential purchase. What is Marko willing to pay today to buy ABC Co.?

a. $35,797.50
b. $33,300.00
c. $24,457.63
d. $26,176.63
e. $27,560.91

Answer 1

Total PV= $26,176.63

Step-by-step explanation:

Giving the following information:

Cash flow:

Cf1= $5,700

Cf2= $10,700

Cf3= $16,900

To calculate the price of the investment now, we need to use the following formula on each cash flow:

PV= Cf / (1+i)^n

PV1= 5,700/1.11= 5,135.14

PV2= 10,700/1.11^2= 8,684.36

PV3= 16,900/1.11^3= 12,357.13

Total PV= $26,176.63