A biofuel subsidiary of Petrofac, Inc. is planning to borrow $12 million to acquire a small technology- based company. The rate on a 5-year loan is highly variable; it could be as low as 7%, as high as 15%, but is expected to be 10% per year. The company will only move forward with the acquisition offer if the AW is below $6.1 million. The M&O cost is fixed at $3.1 million per year. The anticipated sales price of the company could be $2 million if the interest rate is 7% or as much as $2.5 million if the rate is 15%, but will most likely be about $2.3 million at the 10% per year rate. Is the decision to move forward with the acquisition sensitive to the loan interest rate and salvage value estimates?
A biofuel subsidiary of Petrofac, Inc. is planning
to borrow $12 million to acquire a small technology-
based company. The rate on a 5-year loan is
highly variable; it could be as low as 7%, as high as
15%, but is expected to be 10% per year. The company
will only move forward with the acquisition
offer if the AW is below $6.1 million. The M&O cost is fixed at $3.1 million per year. The anticipated
sales price of the company could be
$2 million if the interest rate is 7% or as much as
$2.5 million if the rate is 15%, but will most likely
be about $2.3 million at the 10% per year rate. Is
the decision to move forward with the acquisition
sensitive to the loan interest rate and salvage value
estimates?
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