Your apple orchard business is moving (potentially) into the avocado business. You are evaluating the purchase of
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Question:
Your apple orchard business is moving (potentially) into the avocado business. You are evaluating the purchase of Sunshine Avocadoes. The acquisition requires a capital investment of $30 million and an initial working capital allocation of $5 million (to be returned at the end). The other data are:
- Sales each year of $4,000,000
- Annual cost of goods sold (including fixed and variable) of $900,000
- Depreciation is straight line to zero
- The taxation rate is 30%.
- Your firm has spent $150,000 researching the deal
- If you purchase Sunshine Avocadoes you will add an additional $250,000 to your annual marketing spend.
- The project's life is 15 years.
- The discount rate is 17%.
Will this project create market value for your firm's owners?
a. Yes, because the net present value is $335,609.b. Yes, because the net present value is $5,009,335.
c. No, because the net present value is - $4,508,222.
d. No, because the net present value is - $20,709,293.
e. No, because the net present value is - $56,789,332.
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