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Should you purchase the company?

You are thinking about acquiring a new company. The company is at a bargain asking price of $400,000. You have your expert accountants project a 10 year income statement (see below) based on how well you think you could run this new venture. Now you need to project a ten year cash flow and determine if you should acquire this new entity. You are currently using a 15% discount rate in your calculations. (use at least two decimal places in all calculations)

Net Present Value $____________________
Internal rate of return __________________%
Should you acquire the new company? _________

Net Income
Depreciation After Taxes Net Cash Flow
Year 1 42,870 184,278 ___________
Year 2 73,470 159,018 ___________
Year 3 52,470 162,159 ___________
Year 4 37,470 158,752 ___________
Year 5 26,790 149,365 ___________
Year 6 26,760 129,707 ___________
Year 7 26,790 105,576 ___________
Year 8 13,380 84,448 ___________
Year 9 0 57,539 ___________
Year 10 0 16,053 ___________

Solution Preview

Net Present Value = $483,917.82
Internal rate of return = 51.12%
Should you acquire the new company? Yes, NPV is positive

Net Income
Depreciation After Taxes Net Cash Flow
Year 1 42,870 + 184,278 227148
Year 2 73,470 + 159,018 232488
Year 3 52,470 + 162,159 214629
Year 4 37,470 + 158,752 ...

Solution Summary

Much consideration should be done before making a major purchase. When a business chooses to expand or move their facilities and looks to purchase a new location, accountants need to project a multi-year income statement to see if the purchase is feasible. Cash flows, depreciation and the legal department must be consulted before a decision is made.

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