The managers of BSW, Inc. have approached KCMP Corp. about a possible merger. KCMP Corp. is asking a price of $72 million to be purchased by BSW, Inc. KCMP Corp. currently has total cash flows of $6 million that are expected to grow at two percent annually for the next two years. Managers are uncertain of the growth in KCMP Corp.’s cash flows in year 3. Managers estimate that, because of synergies, the merged firm’s cash flows will increase by an additional $1 million in the first year after the merger and these cash flows will grow by three percent in years 2 and 3 following the merger. Managers have estimated that the present value of any incremental cash flows received after year three is $54.09 million. The WACC for the merged firms is 10 percent. Calculate KCMP Corp.’s minimum incremental cash flow needed in year 3 after the merger such that BSW, Inc. would see this merger as a positive NPV project.
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