You are the director of capital acquisitions for Morningside Hotel Company. One of the projects you are deliberating is the acquisition of Monroe Hospitality, a company that owns and operates a chain of bed-and- breakfast inns.
Susan Sharp, Monroe's owner, is willing to sell her company to Morningside only if she is offered an all-cash purchase price of $5 million. Your project analysis team estimates that the purchase of Monroe Hospitality will generate the following after-tax marginal cash flow
|
Year
|
Cash Flow
|
|
1
|
$1,000,000
|
|
2
|
1,500,000
|
|
3
|
2,000,000
|
|
4
|
2,500,000
|
|
5
|
3,000,000
|
If you decide to go ahead with this acquisition, it will be funded with Morningside's standard mix of debt and equity, at the firm's weighted average (after-tax) cost of capital of 9 percent.
Morningside's tax rate is 30 percent. Should you recommend acquiring Monroe Hospitality to your CEO?