Ram Electric Company is being considered for acquisition by Cavalier Electric. Cavalier expects the combination to increase its cash flows by $100,000 for each of the next 5 years and by $125,000 for each of the following 5 years. Ram Electric has relatively high financial leverage; Cavalier expects its cost of capital to be 12% for the first 5 years and estimates that it will increase to 16% for the following 5 years if the merger is undertaken. The cash price of Ram Electric is $325,000.

TO DO

Create a spreadsheet similar to Table 18.3 to answer the following questions. 

  a. Determine the present value of the expected future cash inflows over the next 10 years.

  b. Calculate the net present value (NPV) for the Ram Electric acquisition.

  c. All else being equal, would you recommend the acquisition of Ram Electric by Cavalier Electric? Explain.