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Alpha Corp.: Going Forward with the Acquisition

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Alpha Corporation is considering buying Beta Corporation for $2,400,000 cash. Beta Corporation has a $600,000 tax loss carryforward that could be used immediately by Alpha Corporation. Alpha Corporation pays tax at the rate of 35%. Beta Corporation will provide $300,000 per year in cash flow (in after tax income plus depreciation) for the next 20 years. If Alpha Corporation has a cost of capital of 11%, should Alpha Corporation go forward with the acquisition?

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Solution Summary

The solution discusses based on the cost of capital if the corporation should go forward with the acquisition.

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We need to calculate the NPV of the acquisition.
The initial cost is $2,400,000 and against this the tax loss can ...

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