You have an opportunity to purchase a private competitor called Fernand in Mexico. You will use only

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You have an opportunity to purchase a private competitor called Fernand in Mexico. You will use only your funds if you decide to purchase the company.
a. When you attempt to determine the value of this company, how will you derive your required rate of return? Specifically, should you use the U.S. or Mexico risk-free rate as a base when deriving your required rate of return? Why?
b. Another Mexican firm called Vascon also considers the purchase of this firm. Explain why Vascon's required rate of return may be higher than your required rate of return? Is there any reason why Vascon's required rate of return may be lower than your required rate of return?
c. Assume that you and Vascon have the same expectations regarding the Mexican cash flows that will be generated by Fernand. Fernand's owner is willing to sell the company for 2 million Mexican pesos. You and Vascon use a similar process to determine the feasibility of acquiring a target. You both compare the present value of the target's cash flows to the purchase price of the target. Based on your analysis, Fernand would generate a positive net present value for your firm. Based on Vascon's analysis, Fernand would generate a negative net present value for Vascon. How could you determine that the acquisition of Fernand is feasible, while Vascon determines that the acquisition of Fernand is not feasible?
d. Repeat Question c, except reverse the assumptions. Based on your analysis, Fernand would generate a negative net present value for your firm. Based on Vascon's analysis, Fernand would generate a positive net present value for Vascon. How could you determine that the acquisition of Fernand is not feasible, while Vascon determines that the acquisition of Fernand is feasible?
Net Present Value
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at...
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