Question

Helios, inc. is considering the purchase of abc co. helios believes that abc co. can generate cash flows of $5,000, $9,000 and $15,000 over the next 3 years, respectively. after that time, they feel the business with be worthless. helios has determined that a 14% rate of return is applicable to this potential purchase. what is helios willing to pay today to buy abc co.?

Answer 1

Price to pay =$21,435.75

Step-by-step explanation:

The amount Helios should be willing to pay is the present value of the future cash flow discounted at the required rate of return of 14%.

The present value of a stream of future cash flow is the amount that would be invested today to earn the stream of cash flows

PV = 5,000× 1.14^(-1) + 9,000× 1.14^(-2) + 15,000× 1.14^(-3)= 21,435.75

Present Value = $21,435.75

Price to pay =$21,435.75