You are an Acquisition Offer for an Investment Bank. You have been told that you must operate with a 6.0% WACC. Your Discount Rate is 6.8%. You have decided that you will make your recommendation based upon a five-year forecast.

The Company:

Gross Income:

Year 1: $824,261

Year 2: $840,746

Year 3: $857,561

Year 4: $874,712

Year 5: $892,206

Year 6: $910,050

You have estimated the cost of operations at the company to be 30%. Additionally, you believe that the ever-changing processing world requires constant upgrades to equipment. Therefore, you are projecting a new file server and workstations will need to be purchased in year four. The cost of the new system is $250.000. You believe a fair Growth Rate is 2%. The asking price is $9,158,455.

Questions:

What is the Residual Rate? Hint: What is the formula for Residual Rate?

What is the Capitalization Rate? Hint: What is the formula for Capitalization Rate?

What is the IRR of the acquisition?

What is the NPV of the acquisition?

Do you recommend this acquisition? Explain.