Determine the present value of expected future cash inflows

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Reference no: EM131084194

Hermes, Inc. is being considered for acquisition by Jupiter, Inc. Jupiter expects the combination to increase its cash flows by $100,000 for each of the next 5 years and by $125,000 for each of the following 5 years. Hermes has relatively high financial leverage; Jupiter expects its cost of capital to be 12% for the first 5 years and estimates that it will increase to 16% for the following 5 years if the merger is undertaken. To acquire Hermes, Jupiter needs to pay $325,000.

Create a spreadsheet similar to Table 18.3 to answer the following questions.

a. Determine the present value of the expected future cash inflows over the next 10 years.

b. Calculate the net present value for the Hermes acquisition.

c. All else being equal, would you recommend the acquisition of Hermes by Jupiter? Explain.

Reference no: EM131084194

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