Marko, Incorporated, is considering the purchase of ABC Company Marko believes that ABC Company can generate cash flows of $5,400, $10,400, and $16,600 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

$26,373.66

$35,154.00

$32,400.00

$24,927.80

$23,136.80

To determine how much Marko, Incorporated is willing to pay today for ABC Company, we need to calculate the **present value** of the expected cash flows, discounted at the given rate of return (12%). 

The formula to calculate the present value of future cash flows is:

\[
PV = \frac{CF_1}{(1 + r)^1} + \frac{CF_2}{(1 + r)^2} + \frac{CF_3}{(1 + r)^3}
\]

Where:
- $ CF_n $ are the cash flows in years 1, 2, and 3, respectively.
- $ r $ is the discount rate (12% or 0.12).
- $ n $ is the year.

Given:
- $ CF_1 = 5400 $
- $ CF_2 = 10400 $
- $ CF_3 = 16600 $
- $ r = 0.12 $

We can now calculate the present value.

### Year 1:
\[
PV_1 = \frac{5400}{(1 + 0.12)^1} = \frac{5400}{1.12}
\]

### Year 2:
\[
PV_2 = \frac{10400}{(1 + 0.12)^2} = \frac{10400}{1.2544}
\]

### Year 3:
\[
PV_3 = \frac{16600}{(1 + 0.12)^3} = \frac{16600}{1.404928}
\]

Let's calculate these values.The total present value of the cash flows, discounted at 12%, is approximately **$24,927.80**.

Thus, Marko, Incorporated would be willing to pay **$24,927.80** today to buy ABC Company.

The correct answer is:
- **$24,927.80**

Would you like a detailed breakdown or further clarifications? 

Here are 5 related questions to explore:
1. How does changing the discount rate affect the present value of the cash flows?
2. What if the cash flows extend beyond three years? How would you calculate the total value?
3. How does the time value of money principle relate to this calculation?
4. What is the net present value (NPV) method, and how does it apply here?
5. What are the risks of using expected future cash flows for valuation?

**Tip:** Always adjust the discount rate based on the risk profile of the investment to get a more accurate present value.

Marko, Incorporated, is considering the purchase of ABC Company. Marko believes that ABC Company can generate cash flows of $5,400, $10,400, and $16,600 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?

Discover how to calculate the present value of future cash flows for ABC Company, using a 12% discount rate. Marko, Incorporated, expects cash flows of $5,400, $10,400, and $16,600 over the next three years. Learn how the time value of money is applied to determine how much Marko should pay today.

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