Motoran Inc. is contemplating the acquisition of a competitor, Tortoran Corp., for $25 million. Motoran's market value is $40 million, whereas that of Tortoran is $20 million. Motoran expects that after the merger the administrative costs of the two companies will be reduced by $1 million forever. Motoran's cost of capital is 12.5 percent.
a. What would be the amount of wealth created by the merger?
b. What is the net present value of the acquisition?