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NCW Co is considering acquiring the ordinary share capital of CEW Co. CEW Co has for years generated an annual cash inflow of $10m. For a one-off investment of $6m in new machinery, earnings for CEW Co can be increased by $2m per year. NCW Co has a cost of capital of 10%.
What is the value of CEW Co?
? $114million
? $120million
? $100 million
? $94 millionFor this question are we supposed to use the discounted cash flow basis method??
So far all I could get was the cashflow of 10+2=12
I did not have any idea in how to approach further than thisWhy are you attempting a question for which you do not have an answer? You should be using a Revision Kit from one of the ACCA Approved Publishers – they have answers and explanations
🙂On the information available then can only value the company based on the PV of the future flows.
The new flows will be $12M per year in perpetuity and so discount the perpetuity in the normal way at the cost of capital of 10%.
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