The annual after-tax free cash flow from the acquisition by Pacific Care of Universal Health is projected to be $12 million. These flows are expected to continue for 20 years. No value is placed on cash flows beyond 20 years. If the appropriate risk-adjusted discount rate is 15 percent, what is the maximum amount Pacific Care should pay to acquire Universal Health?

A) $79,476,000
B) $70,164,000
C) $75,111,600
D) Cannot be determined

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Chrysanthus Thomas · Accepted Answer

Final Answer : C, Explanation :  To determine the maximum amount Pacific Care should pay, we need to calculate the present value of the cash flows. We can use the formula:PV = CF / (1+r)^nWhere:CF = cash flowr = discount raten = number of periodsIn this case, CF is $12 million, r is 15%, and n is 20.PV = $12 million / (1+0.15)^20PV = $75,111,600Therefore, the maximum amount Pacific Care should pay to acquire Universal Health is $75,111,600.

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