RiverRocks’ purchase of Raft Adventures (from Problem 20) will cost $100 million, and will generate cash...

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RiverRocks’ purchase of Raft Adventures (from Problem 20) will cost $100 million, and will generate cash...

RiverRocks’ purchase of Raft Adventures (from Problem 20) will cost $100 million, and will generate cash flows that start at $15 million in one year and then grow at 4% per year forever. What is the NPV of the acquisition?

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Answer 1

Answer #1

PV = FCF₁ /(r-g)

Here, PV is Present Value

FCF₁ is Future Cash Flow of year 1 which is $15 million

r is the discounting factor of the project. In the problem Weighted Average Cost of Capital (WACC) or r is not provided so we assume it to be 15%.

g is the growth rate. In the problem it is 4%

Substituting the value we arrive at the following PV

PV = $15 / (.15-.04)

= $15 / 0.11

= $136.36 million

NPV is the Net Present Value of discounted cash flows less cost of acquiring the asset.

NPV = PV of cash flow - cost of acquisition

=$136.36 million - $100 million

=$36.36 million

As NPV is positive here, therefore we will consider the Raft Adventures for acquisition.

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Answer 2

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