John decided to purchase a firm which is expected to generate net cash flows of $5,000 oneyear from now, $2,000 at the end of each of the next five years and a $10,000 in seven yearsfrom now. Investments of similar characteristics and risk in the market have a discount rate of10%.(a) Determine the value of the firm.(b) What is the incremental value (NPV) of this acquisition if the initial investment made byJohn is $12,000?(15)(10)Note: Show your answers in tables and all calculations properly presented.

Given information : Year Cash flows 1 $ 5,000.00 2 $ 2,000.00 3 $ 2,000.00 4…

John decided to purchase a firm which is expected to generate net cash flows of $5,000 o year from now, $2,000 at the end of each of the next five years and a $10,000 in seven yea rom now. Investments of similar characteristics and risk in the market have a discount rate 10%. (a) Determine the value of the firm. (15) (b) What is the incremental value (NPV) of this acquisition if the initial investment made John is $12,000? (10) Note: Show your answers in tables and all calculations properly presented.

John decided to purchase a firm which is expected to generate net cash flows of $5,000 o year from now, $2,000 at the end of each of the next five years and a $10,000 in seven yea rom now. Investments of similar characteristics and risk in the market have a discount rate 10%. (a) Determine the value of the firm. (15) (b) What is the incremental value (NPV) of this acquisition if the initial investment made John is $12,000? (10) Note: Show your answers in tables and all calculations properly presented.

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter11: Capital Budgeting Decisions

Section: Chapter Questions

Problem 5PB: Mason, Inc., is considering the purchase of a patent that has a cost of $85000 and an estimated...

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John decided to purchase a firm which is expected to generate net cash flows of $5,000 one year from now, $2,000 at the end of each of the next five years and a $10,000 in seven years from now. Investments of similar characteristics and risk in the market have a discount rate of 10%. Determine the value of the firm. (15) What is the incremental value (NPV) of this acquisition if the initial investment made by John is $12,000?
The Hamilton company wants to acquire another company at a cost of $10,000. The new company will add cash flows of $2,000 in year 1, $4,000 in year 2, $3,000 in year 3, $3,000 in year 4 and $4,000 in year 5. Assuming Hamilton has a discount rate of 10% and a payback requirement of 3.75 years, should the company do the investment according to simple payback and IRR?
The following table shows the projected free cash flows of an acquisition target. The potential acquirer wants to estimate its maximum acquisition price at an 8 percent discount rate and a terminal value in year 5 based on the perpetual growth equation with a 4 percent perpetual growth rate. Year 1 2 3 4 5 Free cash flow −830 −415 0 218 736 a. Estimate the target’s maximum acquisition price. (Do not round intermediate calculations. Round your answer to the nearest whole dollar amount.) b. Estimate the target’s maximum acquisition price when the discount rate is 7 percent and the perpetual growth rate is 5 percent. (Do not round intermediate calculations. Round your answer to the nearest whole dollar amount.)
Falkland, Inc., is considering the purchase of a patent that has a cost of $50,000 and an estimated revenue producing life of 4 years. Falkland has a cost of capital of 8%. The patent is expected to generate the following amounts of annual income and cash flows: A. What is the NPV of the investment? B. What happens if the required rate of return increases?
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Mason, Inc., is considering the purchase of a patent that has a cost of $85000 and an estimated revenue producing lite of 4 years. Mason has a required rate of return that is 12% and a cost of capital of 11%. The patent is expected to generate the following amounts of annual income and cash flows: A. What is the NPV of the investment? B. What happens if the required rate of return increases?
The IBC Company is considering undertaking an investment that promises the following cash flows: Period 0 is = -$100 Period 1 is =$80 Period 2 is = $80 If the company waits a year, it can make the following investment: Period 1 is = -2 $220 Period = $280 Assume a time value of 0.10. Which investment should the firm undertake? Use both the net present value and IRR approaches. With the IRR method, use incremental cash flows.
The following table shows the projected free cash flows of an acquisition target. The potential acquirer wants to estimate its maximum acquisition price at an 8 percent discount rate and a terminal value in year 5 based on the perpetual growth equation with a 4 percent perpetual growth rate. Year Free cash flow 1 2 -840 -420 Maximum acquisition price 3 a. Estimate the target's maximum acquisition price. (Do not round Intermediate calculations. Round your answer to the nearest whole dollar amount.) 4 5 224 748 Maximum acquisition price b. Estimate the target's maximum acquisition price when the discount rate is 7 percent and the perpetual growth rate is 5 percent. (Do not round Intermediate calculations. Round your answer to the nearest whole dollar amount.)
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A corporation is considering the purchase of an interest in real estate syndication at a price of $75,000. In return, the syndication promises to pay $1,000 at the end of each month for the next 25 years (300 months). If purchased, what is the expected internal rate of return, compounded monthly? How much total cash would be received on the investment? How much is profit and how much is the return of capital?