The CEO of the company you are following has asked you to analyze the possibility of acquiring a smaller business operation from another company. The purchase will cost $90 million in year zero and will also require $2 million of net working capital. The purchase can be depreciated using a four year straight-line depreciation to $10 million. Assume you can sell the business in four years for $15 million. The new business operation will generate $70 million in revenue each year, which will take $41 million in costs annually. Use the 35% marginal tax rate.
(1) Compute the cash flows for the project.
(2) Use the cost of capital from your firm (Stock Project 4) and a payback benchmark of 3.5 years. Compute the following decision statistics and their accept/reject conclusion.
A. NPV
B. IRR
C. Payback
(3) Make your recommendation to the CEO.