(3 Points) Your Company is looking to acquire a business. The business will gene
ID: 1145947 • Letter: #
Question
(3 Points) Your Company is looking to acquire a business. The business will generate the following cash flows over the next seven years. All cash flows are in dollars and appear on the diagram as end of period values.
A. If the present value of the expected future cash flows represented the company market value today; what should your company be willing to pay today for the business? Assume your company has other opportunities to invest money today and in the future at a nominal 10% interest rate compounded annually?
B. Instead of purchasing the company today for the amount you calculated in part A of this question, if you invested that same dollar amount (answer from part A) in a mutual fund earning 10% per year how much cash would be accrued by the end of year 7?
C. Using the same 10% interest rate, what eight uniform beginning of period cash flows (years 0-7) would be equivalent to the original cash flows inyears 1-7?
25,000 25,000 35,000 35,000 45,000 45,000 45,000 0 2 3 4 5 7 yearsExplanation / Answer
Answer for A
PV of Expected Future Cash flows=
25000/1.1+25000/1.1^2+35000/1.1^3+35000/1.1^4+45000/1.1^5+45000/1.1^6+45000/1.1^7= 170,024
Answer for B
If we have invested the calculated amount in part A into mutual fund for 10% we woud have earned
170,024*(1.1)^7=331,330.3
Answer for Part C
No cash flow in 0 period
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