28 Jun Question You are director of a capital acquisi
Question
You are director of a capital acquisition for Crode. One of the projects you are considering is the acquisition of Geek, a private software company that produces software for finance professors. The owner of Geek is amenable to the idea of selling his business to Crode, but has certain conditions that must be met before selling. The prmary condition set forth is a non-negotiable, all cash purchase price of R20 million. Your project analysis team estimates that the purchase of geek will generate the following marginal cash flows;
Year Cash Flow
1 R1,000,000
2 R3,000,000
3 R5,000,000
4 R7,500,000
5 R7,500,000
Of the R20m in cash needed for the purchase, R5m is available from retained earnings, with a required return of 12% and the remaining R15m will come from a new debt issue yielding 8%. Crode ‘s tax rate is 40%. Should you recommend acquisition of Geek?
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