Question

A biofuel subsidiary of Petrofac, Inc. is planning to borrow $12 million to acquire a small technology-based company. The rate of interest on a 5-year loan is highly variable; it could be as low as 7% or as high as 15%, but it is expected to be 10% per year. The company will only move forward with the acquisition offer if the AW is below $5.8 million. The M&O cost is fixed at $3.1 million per year. The anticipated sales price of the company could be $2 million if the interest rate is 7%, or as much as $2.5 million if the rate is 15%, but will most likely be about $2.35 million at a rate of 10% per year. Is the decision to move forward with the acquisition sensitive to the loan's interest rate and salvage value estimates?

The annual worth with a rate of 7% is $  .

The annual worth with a rate of 10% is $  .

The annual worth with a rate of 15% is $  .

The decision is  (Click to select)  not sensitive  sensitive  .

Answer 1

Answer:

a) Determine the Annual worth with a rate of 7%

We Know that,

Annual worth = -$12,000,000*A/P (7%, 5)-$3,100,000+$2,000,000*P/F (7% , 5)*A/P(7% , 5)

Consider A/p and P/F tables Where r=7% , n=5

The value of A/P (7%,5) = 0.2439

The value of P/F (7%,5) = 0.7130

Therefore,

Annual worth = -$12,000,000*0.2439-$3,100,000+$2,000,000*0.7130*0.2439

Annual worth = -$5,678,998.6

We know that Annual worth only accepts the positive values.

then,

Annual worth = $5,678,998.6

b) Determine the annual worth of rate 10%

We have,

Annual worth =-$12,000,000*A/P(10%, 5)-$3,100,000+$2,350,000*P/F(10% , 5)*A/P(10% , 5)

Consider A/p and P/F tables Where r=10% , n=5

The value of A/P (10%,5) = 0.2638

The value of P/F (10%,5) = 0.6209

Annual worth = -$12,000,000*0.2638-$3,100,000+$2,350,000*0.6209*0.2638

Annual worth = -$5,880,539.552

We know that Annual worth only accepts the positive values.

Therefore,

Annual worth = $5,880,539.552

c) Determine the annual worth of rate 15%

Annual worth = -$12,000,000*A/P(15% , 5)-$3,100,000+$2,500,000*P/F(15%, 5)*A/p(15%, 5)

Consider A/p and P/F tables Where r=15% , n=5

The value of A/P (15%,5) = 0.2983

The value of P/F (15%,5) = 0.4972

Annual worth = -$12,000,000*0.2983-$3,100,000+$2,500,000*0.4972*.0.2983

Annual worth = -$6,308,813.1

We know that Annual worth only accepts the positive values.

Therefore,

Annual worth = $6,308,813.1

d) The decision is Non sensitive