ABC Ltd. is considering the acquisition of XYZ Ltd. The management of ABC believes that cost of goods sold could be reduced by 1.5 percent over the next 3 years (due to purchasing economies) and administrative expenses could be brought down by 3 percent. The forecast of income statement of XYZ under ABC is as follows:

(in Rs)

Year 1 2 3 Sales 60,000 63,000 66,000 COGS 30,000 31,000 33,000 Depreciation 4,000 4,200 4,300 SGA 21,000 22,000 22,500 Assume that cash flow increases at 7 percent after year 3.

ABC needs to incur expenditure on fixed assets and working capital to make operational improvements to XYZ, the details of which is as follows:

(in Rs)

Year 1 2 3 Capex 4,900 5,100 5,300 WC (510) (540) (550)

At a discount rate of 13 percent what is the maximum price that ABC should pay?