Southern Tours is considering acquiring Holiday Vacations. Management believes H

Question

Southern Tours is considering acquiring Holiday Vacations. Management believes Holiday Vacations 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. Southern Tours has determined that a 13.5 percent rate of return is applicable to this potential acquisition. What is Southern Tours willing to pay today to acquire Holiday Vacations?

$503,098 $638,407 $601,226 $538,615 $545,920 Southern Tours is considering acquiring Holiday Vacations. Management believes Holiday Vacations 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. Southern Tours has determined that a 13.5 percent rate of return is applicable to this potential acquisition. What is Southern Tours willing to pay today to acquire Holiday Vacations?

Explanation / Answer

To calculate the present value of cash flows, Discount the cash flows for each year using the discount rate.

PV = CF1 / (1+r)^1 + CF2 / (1+r)^2+ CF3 / (1+r)^3

Where PV is the present value of the cash flows

           CFare the cash flows for each year

           r is the rate if return

PV = $187,000 / (1+0.135)^1 + $220,000 / (1+0.135)^2 + $245,000 / (1+0.135)^3

     = ($187,000 / 1.135) + ($220,000 / 1.2882) + ($245,000 / 1.4621)

     = $164,757.7 + $170,777.6 + $167,563.1

     = $503,098

Therefore, the correct option is $503,098

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.