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Marko, Inc. is considering the purchase of ABC Co. Marko believes that ABC Co. can generate cash flows of $6,600, $11,600, and $17,800 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 13 percent is applicable to this potential purchase. What is Marko willing to pay today to buy ABC Co.?
a. $39,420.00.b. $24,876.50.c. $28,896.22.d. $36,000.00.e. $27,261.50.

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Answer:

e. $27,261.50

Explanation:

Calculation to determine What is Marko willing to pay today to buy ABC Co.

Present value (PV) = $6,600 / (1 + 0.13) + $11,600 / (1 + 0.13)^2 + $17,800 / (1 + 0.13)^3

Present value (PV) = $6,600 / (1 .13) + $11,600 / (1.13)^2 + $17,800 / (1 .13)^3

Present value (PV) =$27,261.50

Therefore the amount that Marko his willing to pay today to buy ABC Co will be $27,261.50

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