Problem:
JH Inc. is thinking of acquiring Verch Inc. JH expects Verch's NOPAT to be $90 million the first year, with no net new investment in operating capital and no interest expense. For the second year, Verch is expected to have NOPAT of $200 million. Also, in second year only, Verch will need $180 million of net new investment in operating capital. Verch's marginal tax rate is 25%. After the second year, the free cash flows and the tax shields from Verch to JH will both grow at a constant rate of three perecent, JH has determined that Verch's cost of equity is 35%, and Verch curerntly has no debt outstanding. Assume that all cash flows occur at the end of the year, JH must pay $26 million to acquire Verch.
Required:
Question: What is the NPV of the proposed acquisition?
Note: Provide support for your rationale.