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Southern Tours is considering acquiring Holiday Vacations. Management believes Holiday Vacations can generate cash flows of $187,000, $220,000, and $250,000 over the next three years, respectively. After that time, they feel the business will be worthless. If the desired rate of return is 13.5 percent, what is the maximum Southern Tours should pay today to acquire Holiday Vacations?

Respuesta :

Answer:

maximum Southern Tours should pay today to acquire Holiday Vacations is $506518.12

Explanation:

given data

cash flows 1 = $187,000,

cash flows 2 = $220,000

cash flows 3 = $250,000

rate of return = 13.5 % = 0.135

to find out

maximum Southern Tours should pay today to acquire Holiday Vacations

solution

we will apply here formula of PV for all 3 cash flow that is express as

PV = [tex]\frac{cash flow 1}{(1+r)} + \frac{cash flow 2}{(1+r)^2} + \frac{cash flow 3 }{(1+r)^3}[/tex]     ............................1

here r is rate of return so put here value we get

PV = [tex]\frac{187000}{(1+0.135)} + \frac{220000}{(1+0.135)^2}+ \frac{250000}{(1+0.135)^3}[/tex]

solve it we get

PV = $506518.12

so maximum Southern Tours should pay today to acquire Holiday Vacations is $506518.12

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