You work for a firm that is trying to decide whether they want to expand their operations by buying another company that caters to a different industry. The company thinks that with the resulting synergies between the two firms, there will be enough cost savings and economies of scale to make the new venture extremely profitable.

Current revenues are $49MM with net income of $43.5MM per year. The companys projected revenue stream is $50MM with negligible costs. For the purposes of this exercise only, let us assume that the costs are zero. If they bought the company, it would initially cost them $4MM with annual ongoing costs of $1MM. They will also inherit a contract that sets a minimum sales volume equivalent to a revenue level of $15MM per year.

The president of the firm asked you to conduct an analysis. The time period that you are looking at is one and a half years with six month increments. The current risk-free rate is 4.00%. You have done some research and it shows that the standard deviation of revenues (on an annual basis) has shown that the standard deviation of the revenues is 55%. Based on this set of data does it makes sense for your firm to buy the company?