Stubborn Motors, Inc

Stubborn Motors, Inc., is asking a price of $10.5 million to be purchased by Rubber Tire Motor Corp. Rubber Tire currently has total cash flows of $6 million which are growing at 1 percent annually. Managers estimate that because of synergies the merged firm's cash flows will increase by an additional 4 percent for the first four years following the merger. After the first four years, incremental cash flows will grow at a rate of 3 percent annually. The WACC for the merged firms is 9.75 percent. Calculate the NPV of the merger. Should Rubber Tire Motor Corporation agree to acquire Stubborn Motors for the asking price of $10.5 million?

A) Agree to the merger because the NPV = -$2.32 million.
B) Agree to the merger because the NPV = $1.03 million.
C) Disagree to the merger because the NPV = -$0.96 million.
D) Agree to the merger because the NPV = $2.48 million.Year after merger