Foreign Acquisition Decision
Solve the following problem:
Idaho Co. consists of two businesses. Its local business is expected to generate cash flows of $1 million at the end of each of the next 3 years. It also owns a foreign subsidiary based in Mexico, whose business is selling technology in Mexico. This business is expected to generate $2 million in cash flows at the end of each of the next 3 years. The main competitor of the Mexican subsidiary is Perez Co., a privately held firm that is based in Mexico. Idaho Co. just contacted Perez Co. and wants to acquire it. If it acquires Perez, Idaho would merge the operations of Perez Co. with its Mexican subsidiary's business. It expects that these merged operations in Mexico would generate a total of $3 million in cash flows at the end of each of the next 3 years. Perez Co. is willing to be acquired for a price of 40 million pesos. The spot rate of the Mexican peso is $.10. The required rate of return on this project is 24 percent.
Determine the net present value of this acquisition by Idaho Co. Should Idaho Co. pursue this acquisition?