“Valuation of ABC Company: Determining the Present Value for Acquisition by Marko, Incorporated at 12% Discount Rate”

QUESTION

Marko, Incorporated, is considering the purchase of ABC Company. Marko believes that ABC Company can generate cash flows of $4,700, $9,700, and $15,900 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 Company? Multiple Choice $23,246.52 $32,875.50 $24,632.59 $21,686.52 $30,300.00 (Write in an essay format optimiizg SEO)

ANSWER

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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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