Question

Southern Tours is considering acquiring Holiday Vacations. Management believes Holiday Vacations can generate cash flows of $218,000, $224,000, and $238,000 over the next three years, respectively. After that time, they feel the business will be worthless. If the desired rate of return is 14.5 percent, what is the maximum Southern Tours should pay today to acquire Holiday Vacations?

Answer 1

$519,799.59

Step-by-step explanation:

Discount rate = R = 14.50%

Year Cash flows Discount factor PV of cash flows

1 218,000.00 0.873362 190,393.0131

2 224,000.00 0.762762 170,858.6793

3 238,000.00 0.666168 158,547.9011

Total of PV = NPV = $519,799.59

Note:

Df = 1/(1+R)^Year

PV of cash flows = Cash flows x Df