John decided to purchase a firm which is expected to generate net cash flows of $5,000 one year from now, $2,000 at the end of each of the next five years and a $10,000 in seven years from now. Investments of similar characteristics and risk in the market have a discount rate of 10%. Determine the value of the firm. (15) What is the incremental value (NPV) of this acquisition if the initial investment made by John is $12,000?

John decided to purchase a firm which is expected to generate net cash flows of $5,000 one year from now, $2,000 at the end of each of the next five years and a $10,000 in seven years from now. Investments of similar characteristics and risk in the market have a discount rate of 10%. Determine the value of the firm. (15) What is the incremental value (NPV) of this acquisition if the initial investment made by John is $12,000?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter23: Corporate Restructuring

Section: Chapter Questions

Problem 10P

See similar textbooks

Similar questions

Falkland, Inc., is considering the purchase of a patent that has a cost of $50,000 and an estimated revenue producing life of 4 years. Falkland has a cost of capital of 8%. The patent is expected to generate the following amounts of annual income and cash flows: A. What is the NPV of the investment? B. What happens if the required rate of return increases?
Mason, Inc., is considering the purchase of a patent that has a cost of $85000 and an estimated revenue producing lite of 4 years. Mason has a required rate of return that is 12% and a cost of capital of 11%. The patent is expected to generate the following amounts of annual income and cash flows: A. What is the NPV of the investment? B. What happens if the required rate of return increases?
Fenton, Inc., has established a new strategic plan that calls for new capital investment. The company has a 9.8% required rate of return and an 8.3% cost of capital. Fenton currently has a return of 10% on its other investments. The proposed new investments have equal annual cash inflows expected. Management used a screening procedure of calculating a payback period for potential investments and annual cash flows, and the IRR for the 7 possible investments are displayed in image. Each investment has a 6-year expected useful life and no salvage value. A. Identify which project(s) is/are unacceptable and briefly state the conceptual justification as to why each of your choices is unacceptable. B. Assume Fenton has $330,000 available to spend. Which remaining projects should Fenton invest in and in what order? C. If Fenton was not limited to a spending amount, should they invest in all of the projects given the company is evaluated using return on investment?
Bouvier Restaurant is considering an investment in a grill that costs $140,000, and will produce annual net cash flows of $21,950 for 8 years. The required rate of return is 6%. Compute the net present value of this investment to determine whether Bouvier should invest in the grill.
As corporate manager for acquisitions, your group is assessing a project that is expected to produce cash flows of $750 at the end year 1, $1,000 at the end of year 2, $850 at the end of year 3, and $2,900 at the end of year 4. If the firm requires a minimum IRR or "hurdle rate" of 10% for these types of investments, what is most you should pay for this project?Your answer should be between 2738.00 and 4355.00 rounded to 2 decimal places, with no special characters.