Murdock Co has additional funds that need to be invested and

Murdock Co. has additional funds that need to be invested, and is considering purchasing an asset that is expected to return $15,000 per year after tax for the next 5 years, with an after-tax disposal value of $30,000. Merrill Co.\'s required rate of return is 10%. What is the maximum amount that Merrill Co. would be willing to pay to purchase this asset? (Use the appropriate discount factor from Appendix A.)

Please show work

Solution

Solution:

After tax annual cash flow from asset = $15,000

Life of asset = 5 years

After tax disposal value at the end of 5 years = $30,000

Maximum amount that company willing to pay for purchase of asset = Present value of cash inflows discounted at 10%

= $15,000 * Cumulative PV Factor at 10% for 5 periods + $30,000 * PV factor at 10% for 5th period

= $15,000 * 3.790787 + $30,000 * 0.620921

= $75,489.44

Hence maximum amount that company would be willing to pay to purchase the asset = $75,489.44