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Cash acquisition

Worldwide Scientific Equipment is considering a cash acquisition of Medical Labs for 1.5 million. Medical Labs will provide the following pattern of cash inflows and synergistic benefits for the next 25 years. There is no tax loss carry forward.

Years
1-5 6-15 16-25
Cash inflows (aftertax) $100,000 $120,000 $160,000
Synergestic benefits (aftertax) 15,000 25,000 45,000

The cost of capital for acquiring firm is 9 %. Should the merger be undertaken?

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Since the NPV at -86702 is negative the merger should not be undertaken

Cost of capital= 9%

Year Cash inflow Synergistic benefit Cost Total PV Factor @ 9% Discounted cash flow=
0 (1,500,000) (1,500,000) 1 -1500000 =-1500000*1
1 100,000 15,000 115,000 0.917431 105505 =115000*0.917431
2 100,000 15,000 115,000 0.84168 96793 =115000*0.84168
3 100,000 15,000 115,000 ...

Solution Summary

The solution evaluates the NPV of cash acquisition.

$2.19