The Clark Corporation desires to expand. It is considering a cash purchase of Ke

Question

The Clark Corporation desires to expand. It is considering a cash purchase of Kent Enterprises for $3.6 million. Kent has a $870,000 tax loss carryforward that could be used immediately by the Clark Corporation, which is paying taxes at the rate of 40 percent. Kent will provide $470,000 per year in cash flow (aftertax income plus depreciation) for the next 25 years. The discount rate is 13 percent. Use Appendix D as an approximate answer, but calculate your final answer using the formula and financial calculator methods.

a. Compute the net present value. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your final answer to 2 decimal places.)

b. Should the merger be undertaken?

Appendix D Present value of an annuity of $1, PVIEA PVA A Period 2% 9 15.562 14.292 13.166 12.166 11.274 10.477 18.046 16.351 14.877 13.590 12.462 11.470 0.594 22.023 19.523 17.413 15.622 14.094 12.783 11.654 10.675 4 2 Appendix D (concluded) Percent Period 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106 1.952 1.816 1.696 1.589 1.407 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589 2.32 2.166 1.997 1.849 1.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991 2.689 2.436 2.220 2.035 1.737 3.998 3.889 3.784 3.685 3.589 3.498 3.410 3.326 2.951 2.643 2.385 2.168 1.824 4.423 4.288 4.160 4.039 3.922 3.812 3.706 3.605 3.161 2.802 2.508 2.263 1.883 4.799 4.639 4.487 4.344 4.207 4.078 3.954 3.837 3.329 2.925 2.598 2.33 1.922 5.132 4.946 4.772 4.607 4.451 4.303 4.163 4.031 3.463 3.019 2.665 2.379 1.948 5.426 5.216 5.019 4.833 4.659 4.494 4.339 4.192 3.571 3.092 2.715 2.414 1.965 5.687 5.453 5.234 5.029 4.836 4.656 4.486 4.327 3.656 3.147 2.752 2.438 1.977 5.918 5.660 5.421 5.197 4.988 4.793 4.611 4.439 3.725 3.190 2.779 2.456 1.985 6.122 5.842 5.583 5.342 5.118 4.910 4.715 4.533 3.780 3.223 2.799 2.469 1.990 6.302 6.002 5.724 5.468 5.229 5.008 4.802 4.6113.824 3.249 2.814 2.478 1.993 6.462 6.142 5.847 5.575 5.324 5.092 4.876 4.675 3.859 3.268 2.825 2.484 1.995 6.604 6.265 5.954 5.668 5.405 5.162 4.938 4.730 3.887 3.283 2.834 2.489 1.997 6.729 6.373 6.047 5.749 5.475 5.222 4.988 4.775 3.910 3.295 2.840 2.49 1.998 6.840 6.467 6.128 5.818 5.534 5.273 5.033 4.812 3.928 3.304 2.844 2.494 1.999 6.938 6.550 6.198 5.877 5.584 5.316 5.070 4.843 3.942 3.311 2.848 2.496 1.999 7.025 6.623 6.259 5.929 5.628 5.353 5.101 4.870 3.954 3.316 2.850 2.497 1.999 7.330 6.873 6.464 6.097 5.766 5.467 5.195 4.948 3.985 3.329 2.856 2.499 2.000 7.496 7.003 6.566 6.1775.829 5.517 5.235 4.979 3.995 3.332 2.857 2.500 2.000 7.634 7.105 6.642 6.233 5.871 5.548 5.258 4.997 3.999 3.333 2.857 2.500 2.000 7.675 7.133 6.661 6.246 5.880 5.554 5.262 4.999 4.000 3.333 2.857 2.500 2.000 ..2 2 2

Explanation / Answer

Year 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Initial investment 3600000 Tax loss from kent 870000 Cash flow after tax 470000 470000 470000 470000 470000 470000 470000 470000 470000 470000 470000 470000 470000 470000 470000 470000 470000 470000 470000 470000 470000 470000 470000 470000 470000 Discount rate 13% A NPV -10,24,907.06 Using the NPV formula and rate as 13% B Since the NPV of the merger is negetive this hsould not be undertaken Year 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Initial investment 3600000 Tax loss from kent 870000 Cash flow after tax 470000 470000 470000 470000 470000 470000 470000 470000 470000 470000 470000 470000 470000 470000 470000 470000 470000 470000 470000 470000 470000 470000 470000 470000 470000 Discount rate 13% A NPV -10,24,907.06 Using the NPV formula and rate as 13% B Since the NPV of the merger is negetive this hsould not be undertaken

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