Question

Your firm plans to buy another company for $100 million. The acquisition is expected to generate...

Your firm plans to buy another company for $100 million. The acquisition is expected to generate net benefit of $20 million per year (at year-end) over 3 years and then $25 million indefinitely (perpetually). If your firm’s cost of capital is 12%, what is the NPV of the proposal and is it worth it?

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Answer #1

Ans: NPV = $ 156,369,959

NPV Project
Year Present value factor =1/(1+r)^n Present value factor (A) Net Cash flows (inflows-outflows) (B) Present value of cash flows (A*B)
1 1/(1+12%) 0.8929 20000000 17857143
2 1/(1+12%)^2 0.7972 20000000 15943878
3 1/(1+12%)^3 0.7118 20000000 14235605
4 1/(12%) 8.3333 25000000 208333333
Present value of cash inflows 256369959
Less: Initial outflow 100000000
NPV 156369959
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