Question

please round correctly. Last few answers I recieved were wrong.

Sid o: n P18-5 (similar to) Question Help 24 Cash acquisition decision Benson Oil is being considered for acquisition by Dodd Oil The combination, Dodd beleves, would increase its cash inflows by $28,000 for each of the next 5 years and by $50,000 for each of the following 5 years Benson has high financial leverage, and Dodd can expect its cost of capital to increase y from 11% to 14 % if the merger is undertaken The cash price of Benson is $115,000 a. Would you recommend the merger? s: b. Would you recommend the merger if Dodd could use the $115,000 to purchase equipment that will return cash inflows of $36,000 per year for each of the next 10 IN years? obl a. The net present value of the merger is anst (Round to the nearest cent) altani T-ne ps:/

Answer 1

The net present value (NPV) of the merger would be $61,647. It is calculated on the excel sheet. Please see the attachment.

Using excel formula of NPV, "NPV(rate, value 1, value 2, value 3,......)". The rate implies cost of capital, while value 1, 2,3, ect refers to the cashflows. The negative(-) cashflow refers cash outgo or cash purchase price of $115,000 while the increase in cashflows of Dodd oil due to the merger, over the next 10 years.

Years 2 4 7 9 10 (1,15,000) Cashflow 28,000 28,000 28,000 28,000 28,000 50,000 50,000 50,000 50,000 50,000 Cost of Capital 14% Net Present Value (NPV) $61,647.37

Answers:

a. i would recommend merger as the NPV of the project is positive and $61,647.

The net present value of the merger is $61,647.40

b. The merger will still be positive, if the cash flow increases by $36,000 for the next 10 years. The NPV of the merger in this case would be $63,842. Please refer to the attachment.

10 6 Years 2 9 1 7 (1,15,000) Cashflow 36,000 36,000 36,000 36,000 36,000 36,000 36,000 36,000 36,000 36,000 Cost of Capital 14% Net Present Value (NPV) $63,842.25