Question

J & J Enterprises is considering a cash acquisition of Patterson Steel Company for $5,400,000. Patterson will provide the following pattern of cash inflows and synergistic benefits for the next 20 years. There is no tax loss carryforward. Use Appendix D as an approximate answer, but calculate your final answer using the formula and financial calculator methods.

	Years
	1–5			6–15			16–20
Cash inflow (aftertax)	$	580,000		$	740,000		$	940,000
Synergistic benefits (aftertax)		54,000			74,000			84,000

The cost of capital for the acquiring firm is 14 percent.

a. Compute the net present value. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.)

b. Should the merger be undertaken?

• No

• Yes

Answer 1

b. Merger should not be undertaken because NPV is negative, means it will incur loss to J.J. Enterprises.