J & J Enterprises is considering a cash acquisition of Patterson Steel Company f
ID: 2802991 • Letter: J
Question
J & J Enterprises is considering a cash acquisition of Patterson Steel Company for $4,300,000. 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. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.)
Years 1–5 6–15 16–20 Cash inflow (aftertax) $470,000 $630,000 $830,000 Synergistic benefits (aftertax) 43,000 63,000 73,000Explanation / Answer
Year (1-5)Cash inflow $470,000
Synergistic benefits 43,000
Total cash inflow $513,000
P.V. $513,000 * 3.605 = $1,849,365
Years (6-15)Cash inflow $630,000
Synergistic benefits 63,000
Total cash inflow $693,000
P.V. $693,000 * 3.206 = $2,221,758
Years (16-20)Cash inflow $830,000
Synergistic benefits 73,000
Total cash inflow $903,000
P.V. $906,000 * .658 = $594,174
Total present value of inflows $4,665,297
Cash inflows $4,665,297
Cash outflow 4,300,000
Net present value $365,297
The positive net present value indicates the merger shouldbe undertaken
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