Cautionary? Tales, Inc., is considering the acquisition of Danger Corp. at its a

Question

Cautionary? Tales, Inc., is considering the acquisition of Danger Corp. at its asking price of $120,000. Cautionary would immediately sell some of? Danger's assets for $12,000 if it makes the acquisition. Danger has a cash balance of $1,200 at the time of the acquisition. If Cautionary believes it can generate? after-tax cash inflows of $26,000 per year for the next 6 years from the Danger? acquisition, should the firm make the?acquisition? Base your recommendation on the net present value of the outlay using? Cautionary's 10?% cost of capital.

The net present value of the acquisition is $ __________________

Explanation / Answer

Statement showing NPV of the acquision

Particulars 0 1 2 3 4 5 6 NPV Acquisition price -120000 Sale of asset of danger 12000 Cash balance acquired 1200 After tax cash flow 26000 26000 26000 26000 26000 26000 Total cash flow -106800 26000 26000 26000 26000 26000 26000 PVIF @ 10% 1 0.909 0.826 0.751 0.683 0.621 0.564 Present value -106800 23636 21488 19534 17758 16144 14676 6437

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