Paramount Landscape Services is considering the acquisition of Barker Gardens, I

Question

Paramount Landscape Services is considering the acquisition of Barker Gardens, Inc. Paramount's management team believes Barker can generate cash flows of $187,000, $220,000, and $245,000 over the next three years, respectively. After that time, they feel the business will be worthless. Paramount has determined that a 9.5 percent annual rate of return is applicable to this potential acquisition. Given this information, what is an appropriate price that Paramount Landscape Services should be willing to pay today to acquire Barker Gardens, Inc.

$503,098

$527,991

$540,864

$598,305

$652,000

$503,098

$527,991

$540,864

$598,305

$652,000

Explanation / Answer

Price = 187000/1.095^1+220000/1.095^2+245000/1.095^3=540864

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