You are the director of capital acquisitions for Crimson Software Company. One of the projects you are considering is the acquisition of Geekware, a private software company that produces software for finance professors. Dave Vanzandt, the owner of Geekware, is amenable to the idea of selling his enterprise to Crimson, but he has certain conditions that must be met before selling.
The primary condition set forth is a nonnegotiable, all-cash purchase price of $20 million. Your project analysis team estimates that the purchase of Geekware will generate the following marginal cash flow:
|
Year
|
Cah Flow
|
|
1
|
$1,000,000
|
|
2
|
3,000,000
|
|
3
|
5,000,000
|
|
4
|
7,500,000
|
|
5
|
7,500,000
|
Of the $20 million in cash needed for the purchase, $5 million is available from retained earnings, with a required return of 12 percent, and the remaining $15 million will come from a new debt issue yielding 8 percent. Crimson's tax rate is 40 percent. Should you recommend acquiring Geekware to your CEO?