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You are a director of a capital acquisition for Crode. One of the projects you are considering is the acquisition of Geek, a private software company...

You are a director of a capital acquisition for Crode. One of the projects you are considering is the acquisition of Geek, a private software company that produces software for finance professors. The owner of Geek is amenable to the idea of selling his business to Crode, but has certain conditions that must be met before selling. The primary condition set forth is a non-negotiable, all-cash purchase price of R20 million. Your project analysis team estimates that the purchase of Geek will generate the following marginal cash flows:



Year Cash Flow

1 R 1,000,000.00

2 R 3,000,000.00

3 R 5,000,000.00

4 R 7,500,000.00

5 R 7,500,000.00

Of the R20 million in cash needed for the purchase, R5 million is available from retained earnings, with a required return of 12 per cent, and the remaining R15 million will come from a new debt issue yielding 8 percent. Crode's tax rate is 40 pe rcent. Should you recommend acquisition of Geek?

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