Question

millonin cre yoar Wand then 11.7% ) is considering an acquisiton of Ratt Agventures (whose WACC is 15.6% ). The purchase will cout $100.8 milion and will gonerate cash fows that atart at $15.4 millon in one yoar and then grow at 3.7% per year forever. What ia the NPV of the acquisicon? The not prosent value of the propoct is: milion. (Round to two decimal places).

Answer 1

To calculate the NPV of the acquisition, the present value of future cash flows is computed using the perpetuity growth formula and then subtracting the acquisition cost. The NPV comes out to be $29.95 million.

Step-by-step explanation:

To calculate the Net Present Value (NPV) of the acquisition, we need to discount the future cash flows back to present value using the Weighted Average Cost of Capital (WACC) of Ratt Adventures, which is 15.6%. The first cash flow is $15.4 million, which occurs in one year, and these cash flows grow perpetually at a rate of 3.7%.

To calculate the present value of a perpetuity, we can use the formula PV = C / (r - g), where C is the cash flow in the first period, r is the discount rate (WACC in this case), and g is the growth rate. So, the present value of the growing perpetuity is $15.4 million / (0.156 - 0.037) = $130.75 million.

Then, we find the NPV by subtracting the acquisition cost from the present value of future cash flows: NPV = Present Value - Acquisition Cost = $130.75 million - $100.8 million = $29.95 million. Thus, the NPV of the acquisition is $29.95 million.