Company A is considerig the acquisition of Company B at a cash price of 6,000,00

Question

Company A is considerig the acquisition of Company B at a cash price of 6,000,000. Primary motivation of Company B is if for is flight routes and landing right to Cuba that is believes will generate after-tax cash flows of 2,000,000 per year during the next 5 years. Company B had liabilities of 9,000,000 and Company A estimates that it can sell the remaining assets of 6,500,000. Company A will use a 15% cost of capital for evaluating the acquisition. Using the NPV approach, make a reccomendation to management of Company A about this proposal.

Explanation / Answer

$ Cost of Acquisition of Company B = 6000000 Additional Working Capital used = 2500000 Total Costs of Acquisition in Year 0 8500000 Net After Tax Cash Flows = 2000000 per year for 5 years Cost of Capital = 15% Given these factors, the NPV of the Project is calculated as under : -15,61,469.39 -$ 1,561,469.39 Since the NPV of the Project is negative, Company A should not acquire Company B.

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