Discounting real cash flows with real interest rates

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Reference no: EM132061530

Marko, Inc. is considering the purchase of ABC Co. Marko believes that ABC Co. can generate cash flows of $5,000, $9,000, and $15,000 over the next three years, respectively. After that time, Marko feels ABC will be worthless. Marko has determined that a 14% rate of return is applicable to this potential purchase. What is Marko willing to pay today to buy ABC Co.?

a. $21,435.74

b. $19,201.76

c. $23,457.96

d. $27,808.17

1) Discounting real cash flows with real interest rates is the same as discounting nominal cash flows with nominal interest rates

True

False

2) If a low-risk company invests in a high-risk project, those cash flows should be discounted at a high cost of capital

True

False

Reference no: EM132061530

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