Question

J & J Enterprises is considering a cash acquisition of Patterson Steel Company for $5,000,000. Patterson will provide the following pattern of cash inflows and synergistic benefits for the next 20 years. There is no tax loss carry-forward.

	Years
	1–5	6–15	16–20
Cash inflow (aftertax)	$540,000	$700,000	$900,000
Synergistic benefits (aftertax)	$ 50,000	$ 70,000	$ 80,000

The cost of capital for the acquiring firm is 15 percent.

a. Calculate the net present value. (Use a Financial calculator to arrive at the answers. Negative answer should be indicated by a minus sign. Do not round intermediate calculations. Round the final answer to nearest whole dollar.)

Net present value           $

Answer 1

Year	Cash Inflow	Synergistic Benefits	Total Benefits	PV Factor	Present Value
			A	1 / (1+15%)^Year	A X PV Factor
1	$ 540,000	$                    50,000	$      590,000	0.870	$       513,043
2	$ 540,000	$                    50,000	$      590,000	0.756	$       446,125
3	$ 540,000	$                    50,000	$      590,000	0.658	$       387,935
4	$ 540,000	$                    50,000	$      590,000	0.572	$       337,334
5	$ 540,000	$                    50,000	$      590,000	0.497	$       293,334
6	$ 700,000	$                    70,000	$      770,000	0.432	$       332,892
7	$ 700,000	$                    70,000	$      770,000	0.376	$       289,472
8	$ 700,000	$                    70,000	$      770,000	0.327	$       251,714
9	$ 700,000	$                    70,000	$      770,000	0.284	$       218,882
10	$ 700,000	$                    70,000	$      770,000	0.247	$       190,332
11	$ 700,000	$                    70,000	$      770,000	0.215	$       165,506
12	$ 700,000	$                    70,000	$      770,000	0.187	$       143,919
13	$ 700,000	$                    70,000	$      770,000	0.163	$       125,147
14	$ 700,000	$                    70,000	$      770,000	0.141	$       108,823
15	$ 700,000	$                    70,000	$      770,000	0.123	$          94,629
16	$ 900,000	$                    80,000	$      980,000	0.107	$       104,727
17	$ 900,000	$                    80,000	$      980,000	0.093	$          91,067
18	$ 900,000	$                    80,000	$      980,000	0.081	$          79,189
19	$ 900,000	$                    80,000	$      980,000	0.070	$          68,860
20	$ 900,000	$                    80,000	$      980,000	0.061	$          59,878
		Total PV			$   4,302,809
		Investment Value			$ (5,000,000)
					$     (697,191)