HiHo Inc. is evaluating a merger with the following cash flows:
-Years 1 and 2 Incremental Cash Flows: $10 million each year
-Year 3 incremental cash flow: $40 million
-Discount rate = 10 percent
What is the most HiHo should pay for this merger?
A) $38.53 million
B) $41.09 million
C) $47.41 million
D) $51.27 million

Question

Quizplus · Accepted Answer

To find the maximum amount HiHo should pay for the merger, we calculate the present value of the incremental cash flows. Using a discount rate of 10%, the present value (PV) calculations are as follows:- Year 1: $10 million / (1 + 0.10)^1 = $9.09 million- Year 2: $10 million / (1 + 0.10)^2 = $8.26 million- Year 3: $40 million / (1 + 0.10)^3 = $30.06 millionAdding these up gives us the total present value: $9.09 million + $8.26 million + $30.06 million = $47.41 million. This is the maximum amount HiHo should pay for the merger to achieve a non-negative net present value from the investment.

HiHo Inc Is Evaluating a Merger with the Following Cash Flows