RiverRocks realizes that it will have to raise the financing for the acquisition

Question

RiverRocks realizes that it will have to raise the financing for the acquisition of Raft Adventures by issuing new debt and equity. The acquisition project has a net present value of $36.77 million. The firm estimates that the direct issuing costs will come to $7.24 million. How should it account for these costs in evaluating the project? Should RiverRocks proceed with the project? How should it account for these costs in evaluating the project? (Select the best choice below.) ( A. The direct issuing costs should be included as a direct cost and should be amortized over the life of the project. O B. The direct issuing costs should not be included as a direct cost of the acquisition because it is a sunk cost. C. The direct issuing costs should be included as a direct cost of the acquisition, ie, O D. The direct issuing costs should be included as a direct cost of the acquisition, i.e., Should RiverRocks go ahead with the project? (Select from the drop-down menu.) RiverRocks NPV- $36.77 million- $7.24 million $29.53 million NPV- $36.77 million$7.24 million $44.01 million go ahead with the project.

Explanation / Answer

Net present value of the project will be calculated with taking all the factors of Cash inflow and cash outflow Direct issuing cost is also a cash outflow of the project . IT means Net present value of $ 36.77 million is taken after the taking consideration of outflow of $ 7.24 Million So, Answer = Option A = The Direct issuing cost should be included as a direct cost and should be amortize over the life of the project.

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