To calculate the present value of the future cash flows that Marko, Incorporated expects to receive from the purchase of ABC Company, we can use the formula for the present value of a series of future cash flows:
��=��1(1+�)1+��2(1+�)2+��3(1+�)3+…+���(1+�)�
Where: PV = Present Value CF1, CF2, CF3, … = Cash flows for each period (in this case, three years) r = Discount rate (12 percent in this case) n = Number of periods
In this scenario:
CF1 = $4,700
CF2 = $9,700
CF3 = $15,900
r = 0.12 (12 percent)
n = 3 (for three years)
Now, let’s calculate the present value of these cash flows:
��=4,700(1+0.12)1+9,700(1+0.12)2+15,900(1+0.12)3
Let’s calculate it step by step:
PV1 = \frac{4,700}{(1 + 0.12)^1} = \frac{4,700}{1.12} \approx $4,196.43
PV2 = \frac{9,700}{(1 + 0.12)^2} = \frac{9,700}{1.2544} \approx $7,731.13
PV3 = \frac{15,900}{(1 + 0.12)^3} = \frac{15,900}{1.404928} \approx $11,310.67
Now, add up these present values:
��=��1+��2+��3 PV = $4,196.43 + $7,731.13 + $11,310.67 PV ≈ $23,238.23
So, Marko, Incorporated would be willing to pay approximately $23,238.23 today to buy ABC Company, considering a discount rate of 12 percent.
Unfortunately, none of the multiple-choice options provided matches this calculated value. The closest option to the calculated value is “$23,246.52,” which might be a rounding discrepancy. Therefore, the closest answer choice to the calculated value is $23,246.52.
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