A biofuel subsidiary of Petrofac, Inc. is planning to borrow $12 million to acquire a small technology-

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A biofuel subsidiary of Petrofac, Inc. is planning to borrow $12 million to acquire a small technology- based company. The rate on a 5-year loan is highly variable; it could be as low as 7%, as high as 15%, but is expected to be 10% per year. The company will only move forward with the acquisition offer if the AW is below $6.1 million. The M&O cost is fixed at $3.1 million per year. The anticipated sales price of the company could be $2 million if the interest rate is 7% or as much as $2.5 million if the rate is 15%, but will most likely be about $2.3 million at the 10% per year rate. Is the decision to move forward with the acquisition sensitive to the loan interest rate and salvage value estimates?

Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...
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Engineering Economy

ISBN: 978-0073523439

8th edition

Authors: Leland T. Blank, Anthony Tarquin

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