Question
A biofuel subsidiary of Petrofac, Inc. is planning to borrow $12 million to acquire a small technology-based company. The rate of interest on a 5-year
A biofuel subsidiary of Petrofac, Inc. is planning to borrow $12 million to acquire a small technology-based company. The rate of interest on a 5-year loan is highly variable; it could be as low as 7% or as high as 15%, but it is expected to be 10% per year. The company will only move forward with the acquisition offer if the AW is below $5.8 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 $2.35 million at a rate of 10% per year. Is the decision to move forward with the acquisition sensitive to the loan's interest rate and salvage value estimates?
a) The annual worth with a rate of 7% is $.......
b) The annual worth with a rate of 7% is $.......
c) The annual worth with a rate of 7% is $.......
d) Is the decision sensitive or not sensitive?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started