You are the director of capital acquisitions for Morningside Hotel Company. One of the projects you are deliberating is the acquisition of Monroe Hospitality, a company that owns and operates a chain of bed-and-breakfast inns. Susan Sharp, Monroe’s owner, is willing to sell her company to Morningside only if she is offered an all-cash purchase price of $5 million. Your project analysis team estimates that the purchase of Monroe Hospitality will generate the following after-tax marginal cash flow:

Year Cash Flow

1 ............. $1,000,000

2 .............1,500,000

3 .............2,000,000

4 .............2,500,000

5 .............3,000,000

If you decide to go ahead with this acquisition, it will be funded with Morningside’s standard mix of debt and equity at the firm’s weighted average (after-tax) cost of capital of 9%. Morningside’s tax rate is 30%. Should you recommend acquiring Monroe Hospitality to your CEO?