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Homework answers / question archive / Cash acquisition decision Benson Oil is being considered for acquisition by Dodd Oil
Cash acquisition decision Benson Oil is being considered for acquisition by Dodd Oil. The combination, Dodd believes, would increase its cash inflows by $32,000 for each of the next 5 years and by $52,000 for each of the following 5 years. Benson has high financial leverage, and Dodd can expect its cost of capital to increase from 14% to 17% if the merger is undertaken. The cash price of Benson is $115,000.
a. Would you recommend the merger? b. Would you recommend the merger if Dodd could use the $115,000 to purchase equipment that will return cash inflows of $34,000 per year for each of the next 10 years?
a. The net present value of the merger is $
. (Round to the nearest cent.)
Would you recommend the merger? (Select the best answer below.)
O No O Yes
b. The net present value of purchasing the new equipment is $
. (Round to the nearest cent.)
Which alternative would you recommend? (Select the best answer below.)
C) Acquire Benson Oil Q Purchase the new equipment
PFA
IN THIS CASE THE MERGER SHOUL BE UNDERTAKEN BECAUSE THE NPV OF MERGER IS HIGHER THAN THE NPV OF PURCHASE OF EQUIPEMENT.
