J & J Enterprises is considering a cash acquisition of Patterson Steel Company f
ID: 2658142 • Letter: J
Question
J & J Enterprises is considering a cash acquisition of Patterson Steel Company for $4,500,000. Patterson will provide the following pattern of cash inflows and synergistic benefits for the next 20 years. There is no tax loss carryforward. Use Appendix D as an approximate answer, but calculate your final answer using the formula and financial calculator methods.
The cost of capital for the acquiring firm is 12 percent.
a. Compute the net present value. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
b. Should the merger be undertaken?
Years 1–5 6–15 16–20 Cash inflow (aftertax) $ 490,000 $ 650,000 $ 850,000 Synergistic benefits (aftertax) 45,000 65,000 75,000Explanation / Answer
a) Years 1–5 6–15 16–20 Cash inflow (aftertax) $ 4,90,000 6,50,000 8,50,000 Synergistic benefits (aftertax) 45,000 65,000 75,000 Total 5,35,000 7,15,000 9,25,000 PV of benefits for years 1-5 = 535000*(1.12^5-1)/(0.12*1.12^5) = 1928555.27 PV of benefits for years 6-15 = 715000*(1.12^10-1)/(0.12*1.12^10*1.12^5) = 2292353.13 PV of benefits for years 16-20 = 925000*(1.12^5-1)/(0.12*1.12^5*1.12^15) = 609185.70 Total PV of benefits 1-20 4830094.09 Less: Acquisition cash price 4500000.00 NPV 330094.09 b) The merger can be undertaken as the NPV is positive.
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