Written Problem 2:

Ram Electric Company is being considered for acquisition by Cavalier Electric. Cavalier expects the combination to increase its cash flows by $100,000 for each of the next five years and by $125,000 for each of the following five years. Ram Electric has relatively high financial leverage; Cavalier expects its costs of capital to be 12% for the first five years and estimates that it will increase to 16% for the following five years if the merger is undertaken. The cash price of Ram Electric is $325,000.

a. Determine the present value of the expected future cash inflows over the next ten years. Show your work.

b. Calculate the NPV for the Ram Electric acquisition. Show your work.

c. All else being equal, would you recommend the acquisition of Ram Electric by Cavalier Electric? Explain