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7 May, 05:55

Wansley Lumber is considering the purchase of a paper company. Purchasing the company would require an initial investment of $300 million. Wansley estimates that the paper company would provide net cash flows of $40 million at the end of each year for the next 20 years. The cost of capital for the paper company is 13%.

a. Should Wansley purchase the paper company?

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  1. 7 May, 08:11
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    a. NO

    Explanation:

    In this question we have to find out the net preset value which is shown below:

    = Present value of all annual cash inflows after implementation of discount factor - initial investment

    where,

    The Initial investment is $300 million

    All yearly cash flows would be

    = Annual net cash flows * PVIFA for 20 years at 13%

    = $40 million * 7.0248

    = $280.992 million

    Refer to the PVIFA table

    So, the net present value would be

    = $280.992 million - $300 million

    = - $19.008 million

    Since the net present value comes in negative, so the wansley should not purchase the paper company
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