Acme is looking to acquire Pinder Co now. Acme is expected to generate annual cash flows of $15,000,000 in perpetuity and Pinder is expected to generate annual cash flows of $6,000,000 in perpetuity. The discount rate for both Acme and Pinder is 8%. If Acme acquires Pinder, Acme expects to be able to reduce operating costs by $4,500,000 for the first five years. However, Acme will also incur integration costs of $3,000,000 in the first year. All cash flows occur at the end of the year. To encourage investment into electric bicycles, the government is offering Acme an option to abandon its operations and sell all related assets for $1 million at the end of year 4. If Acme chooses the option to sell all related assets to the government, it will not receive the cash flows generated from the electric bicycle business in that year. What is the value of this option? Answer based only on the information provided.
Acme is looking to acquire Pinder Co now. Acme is expected to generate annual cash flows of $15,000,000 in perpetuity and Pinder is expected to generate annual cash flows of $6,000,000 in perpetuity. The discount rate for both Acme and Pinder is 8%. If Acme acquires Pinder, Acme expects to be able to reduce operating costs by $4,500,000 for the first five years. However, Acme will also incur integration costs of $3,000,000 in the first year. All cash flows occur at the end of the year.
To encourage investment into electric bicycles, the government is offering Acme an option to abandon its operations and sell all related assets for $1 million at the end of year 4. If Acme chooses the option to sell all related assets to the government, it will not receive the cash flows generated from the electric bicycle business in that year. What is the value of this option? Answer based only on the information provided.
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