J J Enterprises is considering a cash acquisition of Patters

J &J; Enterprises is considering a cash acquisition of Patterson Steel Company for $5,600,000. Patterson will provide the following pattern of cash inflows and synergistic benefits for the next 20 years. There is no tax loss carryforward. Use Appendix D as an approximate answer, but calculate your final answer using the formula and financial calculator methods. Years 1-5 6-15 16-20 S600,000 $760,000$960.000 76,000 Cash inflow (aftertax) 86,000 Synergistic benefits (aftertax) The cost of capital for the acquiring firm is 14 percent. a. Compute the net present value. (Negative amount should be indicated by a minus sign. Do not 56,000 round intermediate calculations. Round your answer to 2 decimal places.) Net present value b. Should the merger be undertaken? No ?Yes

Solution

A) NPV = - 580015.29

b) No the merger shoudl not be undertaken because NPV is negative .

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		A	B	C	D	E	F	G	H	I	J	K	L	M	N	O	P	Q	R	S	T	U
1	Year	0	1	2	3	4	5	6	7	8	9	10	11	12	13	14	15	16	17	18	19	20
2	Cash Acquisition	-5600000
3	Cash Inflow		600000	600000	600000	600000	600000	760000	760000	760000	760000	760000	760000	760000	760000	760000	760000	960000	960000	960000	960000	960000
4	Synergistic Benefit		56000	56000	56000	56000	56000	76000	76000	76000	76000	76000	76000	76000	76000	76000	76000	86000	86000	86000	86000	86000
5	Total Value	-5600000	656000	656000	656000	656000	656000	836000	836000	836000	836000	836000	836000	836000	836000	836000	836000	1046000	1046000	1046000	1046000	1046000
6	Discount Rate	14%
	NPV	-580015.29	NPV(A6,B5:U5)+A2