Question

In: Finance

RiverRocks, whose WACC is 12.8 ​%, is considering an acquisition of Raft Adventures​ (whose WACC is...

RiverRocks, whose WACC is 12.8 ​%, is considering an acquisition of Raft Adventures​ (whose WACC is 14.8 ​%). The purchase will cost $ 101.7 million and will generate cash flows that start at $ 14.1 million in one year and then grow at 3.7 % per year forever. What is the NPV of the​ acquisition?

The net present value of the project is ​$_____ million.  ​(Round to two decimal​ places.)

Solutions

Expert Solution

The net present value of the project is ​$47.25 million.

Step-1:Calculation of present value of cash inflow
Present value of cash inflow = CF1/(Ke-g)
= 14.1/(0.1280-0.0370)
= $ 154.95
Where,
CF1 = Cash flow in year 1 = $       14.1
g = Growth rate of cash flow = 3.70%
Ke = Discount rate = 12.80%
Note:
RiverRocks is acquiring Raft Adventures.So, WACC of RiverRocks is relevent for discounting cash inflows.
Step-2:Calculation of NPV of project
Present value of cash inflow $ 154.95
Less Cost of Project $ 107.70
NPV $    47.25
Note:
Dollar amounts are in million.

 

jeff jeffy answered 2 years ago
Next > < Previous

Related Solutions

9.  Problem 12.17 (Optimal Capital Budget) eBook Hampton Manufacturing estimates that its WACC is 12.8%. The company...
9.  Problem 12.17 (Optimal Capital Budget) eBook Hampton Manufacturing estimates that its WACC is 12.8%. The company is considering the following seven investment projects: Project Size IRR A $ 650,000 14.5 % B 1,150,000 14.0 C 1,150,000 13.7 D 1,250,000 13.5 E 800,000 13.2 F 800,000 12.6 G 750,000 12.3 Assume that each of these projects is independent and that each is just as risky as the firm's existing assets. Which set of projects should be accepted? Project A -Select-acceptdon't acceptItem...
A toy manufacturer is considering an acquisition plan. The acquisition should be through either project A...
A toy manufacturer is considering an acquisition plan. The acquisition should be through either project A or B or C as they are mutually exclusive projects. Information about the initial cost and cash flows is as follows: time project A project B project C 0 ($50,000) ($180,000) ($420,000) 1 $15,000 $90,000 $220,000 2 $11,000 $7,000 $160,000 3 $26,000 $6,000 $95,000 4 $14,000 $115,000 $35,000 If the discount rate is 9%. Answer the following: a. Find the NPV for each project....
Rocket Inc. is considering a project that has the following cash flow and WACC data. WACC:...
Rocket Inc. is considering a project that has the following cash flow and WACC data. WACC: 10.00% Year 0    1 2 3 4 Cash flows -$1,000 $510 $440 $425 $405 What is the project's payback?    What is the project's discounted payback?    Is the project worthwhile to undertake? (Would you undertake the project?) Why?
- An Acquirer is considering the acquisition of a Target. The acquirer wishes to assess the...
- An Acquirer is considering the acquisition of a Target. The acquirer wishes to assess the impact of alternative forms of payment on post-merger earnings per share (EPS). Furthermore, the acquirer believes that any synergies in the first year following closing would be fully offset by costs incurred in combining the two businesses. The Acquirer’s marginal tax rate is 40%. Selected data are presented as follows: Pre-Merger Data Acquirer Target Net Earnings $281,500,000 $62,500,000 Shares Outstanding 112,000,000 18,750,000 EPS $2.51...
You are considering the acquisition of a new piece of equipment with a useful life of...
You are considering the acquisition of a new piece of equipment with a useful life of five years. This new technology will make your clinical operation more efficient and allow for a reduction of 10 FTEs. The equipment purchase price is $4,500,000 plus 10% installation fee. The purchase price includes service for the first year, an item that has an annual cost of $10,000. There is a potential for additional volume of 150,000 units in the first year, growing by...
You are considering the acquisition of a new piece of equipment with a useful life of...
You are considering the acquisition of a new piece of equipment with a useful life of five years. This new technology will make your clinical operation more efficient and allow for a reduction of 10 FTEs. The equipment purchase price is $4,500,000 plus 10% installation fee. The purchase price includes service for the first year, an item that has an annual cost of $10,000. There is a potential for additional volume of 150,000 units in the first year, growing by...
Carey Company is considering the acquisition of additional equipment for the business and is analyzing the...
Carey Company is considering the acquisition of additional equipment for the business and is analyzing the opportunity to purchase versus lease the equipment. The staff at Carey Co. fully understands the accounting for a purchase of equipment but is not familiar with the new rules related to lease accounting (ASC 842). Prepare a memo presenting information to Carey Company specifically addressing the following at a minimum. Responses should be incorporated as a part of the memo discussion rather than as...
You are considering the proposed acquisition of a truck for the firm. The truck has a...
You are considering the proposed acquisition of a truck for the firm. The truck has a base price of Tk. 300,000 and it will take another Tk.50,000 to modify it for the intended use. The truck has a life of 5 years and after that period it can be sold for Tk. 100,000. The use of truck will require an increase in the net operating working capital of Tk. 10,000. The truck will reduce cost by Tk. 55,000 in before...
An auditor is considering the acquisition of a new client. The auditor owns shares of the...
An auditor is considering the acquisition of a new client. The auditor owns shares of the potential new client’s voting common stock. The market value of the auditor’s investment is immaterial with respect to the auditor’s personal income and wealth. If the auditor were to perform an attest service for this client, discuss which one AICPA Rule of Conduct would be most relevant to this situation and whether the auditor would be in violation of it. Explain and be specific.
The Misthosi Company is considering the acquisition of a machine that costs of $50,000 if bought...
The Misthosi Company is considering the acquisition of a machine that costs of $50,000 if bought today. The company can buy or lease the machine. If it buys the machine, the machine would be depreciated as a 3-year MACRS asset and is expected to have a salvage value of $1,000 at the end of the 5-year useful life. If leased, the lease payments are $12,000 each year for five years, payable at the beginning of each year. The tax rate...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT