Capital Budgeting Analysis You have been asked to evaluate a potential acquisition of a smaller privately owned competitor. The acquisition candidate produces an EBITDA of 10% of your current EBITDA of 12, 550 and is offered to your firm at a price of multiple of 8 times EBITDA. Assume the following:
- Current debt costs you 8% and you can raise additional debt at this rate today. The loan is to be amortized over 7 years.
- Current return on equity is 15%
- Current WACC is 10%
- Tax rate is 30% (constant)
- 80% of the purchase price is considered depreciable assets – to be depreciated over ten years on a straight-line basis with no residual values.
- Residual value for this operation is to be 2x current EBITDA in year ten.
Need help creating an after-tax cash flow analysis to answer the following:
- Economic analysis: is this a fundamentally sound investment?
- Using the tax cash flows and no debt (pure equity), is the prospect a positive NPV using ROE as the hurdle rate?
- Using the after tax cash flows and the firm’s WACC, is this project desirable? Explain how you came to this conclusion.
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