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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 1 year ago
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