Marketing Concepts, Inc. is considering the acquisition of Management Theories, Inc. at a cashprice of $1.5 million. Management Theories, Inc. has short?term liabilities of $500,000. As a resultof acquiring Management Theories, Inc., Marketing Concepts, Inc. would acquire the copyrights to a national best?seller which would provide an estimated cash flow of $300,000 for the next five years. The firm has a cost of capital of 20 percent. The approximate net present value of this acquisition is
A) -$1,102,700.
B) $480,800.
C) -$102,700.
D) $500,000.

Question

Quizplus · Accepted Answer

The net present value of the acquisition is the present value of the cash flows minus the acquisition price. The present value of the cash flows is $300,000 x (1 - 1/(1 + 0.2)^5)/0.2 = $980,800. The net present value is $980,800 - $1,500,000 = -$519,200.