Question
Cautionary Tales, Inc., is considering the acquisition of Danger Corp. at its asking price of $140,000. Cautionary would immediately sell some of Danger's assets for
Cautionary Tales, Inc., is considering the acquisition of Danger Corp. at its asking price of $140,000. Cautionary would immediately sell some of Danger's assets for $14,000 if it makes the acquisition. Danger has a cash balance of $1,400 at the time of the acquisition. If Cautionary believes it can generate after-tax cash inflows of $30,000 per year for the next 7 years from the Danger acquisition, should the firm make the acquisition? Base your recommendation on the net present value of the outlay using Cautionary's 10% cost of capital.
The net present value of the acquisition is $______
Based on the NPV, should Cautionary make the acquisition? (YES OR NO)
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