Question
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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. | ||||||
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