Question one

After conducting a viability study, Spring Clean Chemicals is considering the acquisition of Daily Chemicals for $ 250,000 cash. Spring Clean Chemicals estimates that the acquisition would increase its cash flows by $ 45,000 per year for each of the next 5 years after the acquisition, then increase its cash flows by $ 90,000 per year for each of the following 5 years. If the acquisition is successful, the cost of capital will increase from 10% to 13%.

Required:

a) Should Spring Clean Chemicals acquire Daily Chemicals? Explain.

b) Spring Clean Chemicals could invest the $ 250,000 in equipment required for a production process that would provide cash inflows of $52,000 per year for each of the next 10 years. Should Spring Clean Chemicals go ahead with the acquisition, or should it invest in the equipment?

c) If the cost of capital did not change due to the acquisition, would your decision in part (b) above be different? Explain.