Question

At the beginning of 2020, market analysts expect Atlantis Company, holder of a valuable patent, to earn the following stream of economic profits over the next five years. At the end of five years, Atlantis will lose its patent protection, and analysts expect economic profit to be zero after five years. YearExpected Economic Profit 2020$225,000 2021$325,000 2022$425,000 2023$200,000 2024$100,000 If investors apply an annual risk-adjusted discount rate of 15%, the value of Atlantis Company in 2020 is $______________________, which is also the maximum price investors would be willing to pay for Atlantis Company.

Answer 1

The value of Atlantis Company in 2020 is $884,911.59

Step-by-step explanation:

In order to calculate the value of Atlantis Company in 2020, we would have to calculate the present value of its profits at the discount rate of 15%, as follows:

PV = $225,000/(1+0.15)^1 + $325,000/(1+0.15)^2 + $425,000/(1+0.15)^3 + $200,000/(1+0.15)^4 + $100,000/(1+0.15)^5

PV = $884,911.59

The value of Atlantis Company in 2020 is $884,911.59