Gross Income: Year 1: $610,261 Year 2: $644,746 Year 3: $676,561 Year 4: $694,712 Year 5: $713,206 Year 6: $716,050 You have estimated the cost of operations at the company to be 40%. Additionally, you believe that the ever-changing processing world requires constant upgrades to equipment. Therefore, you are projecting a new file server and workstations will need to be purchased in year two. The cost of the new system is $75.000. You believe a fair Growth Rate is 2%. Your WACC is 5.3%. The asking price is $5,100,000. Your firm requires all investment models to be based on 5 years.

 Questions: 1. What is the Residual Rate? Hint: What is the formula for Residual Rate? 

2. What is the Capitalization Rate? Hint: What is the formula for the Capitalization Rate? 

3. What is the IRR of the acquisition? 

4. What is the NPV of the acquisition? 5. Do you recommend this acquisition? Explain.

Answer rating: 100% (QA)

The residual rate also known as the terminal growth rate is the expected growth rate of the cash flows beyond the forecasted period in this case beyond the 5year projection It represents the longterm ... View the full answer