Question

Marko, Inc. is considering the purchase of ABC Co. Marko believes that ABC Co. can generate cash flows of $4,700, $9,700, and $15,900 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 12 percent is applicable to this potential purchase. What is Marko willing to pay today to buy ABC Co.?

Answer 1

Marko willing to pay today $23246.51

Step-by-step explanation:

given data

cash flows year 1 F1 = $4,700

cash flows year 2 F2 = $9,700

cash flows year 3 F3 = $15,900

rate of return r = 12 percent = 0.12

solution

we get here present value that is express as

present value =
`(F1)/((1+r)^1) +(F2)/((1+r)^2) +(F3)/((1+r)^3)` ..........................1

put here value we will get

present value =
`(4700)/((1+0.12)^1) +(9700)/((1+0.12)^2) +(15900)/((1+0.12)^3)`

present value = $23246.51

so Marko willing to pay today $23246.51