You are an Acquisition Offer for an Investment Bank. You work in the High- Tech Investment Division of the Investment Bank. You understand high tech companies come and go very quickly. You also understand that the technology changes so quickly that a long-term forecast can be worthless very quickly. It is a changing market. You have been offered the opportunity to acquire a Silicone Valley based high tech company. You must decide if you recommend making the acquisition. You have been told that you must operate with a 6.0% WACC. You have decided that you will make your recommendation based upon a four-year forecast. 

The Company, MERCO, makes processing chips for Intel. MERCO has signed two contracts with Intel. The first expires in two years and pays the company an annual amount of $1,924,261 and $2,212,900 for each year. The second contract was signed because Intel was happy with the work MERCO had done for it. The second contract pays annual payments of $2,544,835, $2,926,560 and $2,926,560 in years 3, 4 and 5. You have estimated the cost of operations at the company to be 40%. Additionally, you believe that the ever-changing processing world requires constant upgrades to equipment. Therefore, you are projecting a new file server and workstations will need to be purchased in year three. The cost of the new system is $800,000. The asking price is $21,000,000. A laughable number. You believe a fair Cap Rate is 9.5%. 

Questions: 

1. What is the IRR of the acquisition? 

2. What is the NPV of the acquisition? 

3. Is there a profit on the sale at the end of year 4? If so, what is the profit? 

4. What is the Capital Gains tax on Sale? 

5. Do you recommend this acquisition? Explain.

Answer rating: 100% (QA)

1 Calcn of IRR year revenue Cost adiitional expenditure Cf PVF 5 NPV year revenue Cost adiitional ex... View the full answer