Question

Management Theories, Inc. at a cash price of $1.5 million. Management Theories, Inc. has short-term liabilities of $500,000. As a result of acquiring Management Theories, Inc., Marketing Concepts, Inc. would acquire the copyrights to a national best-seller which would provide an estimated cash flow of $300,000 for the next five years. The firm has a cost of capital of 20 percent. The approximate net present value of this acquisition is

Answer 1

$1,102,820

Step-by-step explanation:

The computation of the net present value is shown below:

= Present value of yearly cash inflows - initial investment

where,

Present value of yearly cash inflows is

= Annual year cash inflows × PVIFA factor

= $300,000 × 2.9906

= $897,180

And, the initial investment is

= $1,500,000 + $500,000

= $2,000,000

So the net present value is

= $897,180 - $2,000,000

= $1,102,820