Question

Marko, Inc., is considering the purchase of ABC Co. Marko believes that ABC Co. can generate cash flows of $5,000, $10,000, and $16,200 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

The maximum that Marco is willing to pay to buy ABC Co. today is $23967.0645

Step-by-step explanation:

The maximum amount that Marco will be willing to pay today will be the present value of the expected cash flows discounted at the required rate of return. Using the discounted cash flows approach also known as DCF approach, we can calculate the present value of the cash flows,

Present Value = CF1 / (1+r) + CF2 / (1+r)^2 + ... + CFn / (1+r)^n

Where,

• CF is the cash flow
• r is the required rate of return

Present value = 5000 / (1+0.12) + 10000 / (1+0.12)^2 + 16200 / (1+0.12)^3

Present value = $23967.0645

The maximum that Marco is willing to pay to buy ABC Co. today is $23967.0645