A biofuel subsidiary of Petrofac, Inc. is planning to borrow $12 million to acquire a small technology-based company. The rate of interest on a 5-year loan is highly variable; it could be as low as 7% or as high as 15%, but it is expected to be 10% per year. The company will only move forward with the acquisition offer if the AW is below $6.1 million. The M&O cost is fixed at $3.1 million per year. The anticipated sales price of the company could be $2 million if the interest rate is 7%, or as much as $2.5 million if the rate is 15%, but will most likely be about $2.5 million at a rate of 10% per year. Is the decision to move forward with the acquisition sensitive to the loan's interest rate and salvage value estimates?

A biofuel subsidiary of Petrofac, Inc. is planning to borrow $12 million to acquire a small technology-based company. The rate of interest on a 5-year loan is highly variable; it could be as low as 7% or as high as 15%, but it is expected to be 10% per year. The company will only move forward with the acquisition offer if the AW is below $6.1 million. The M&O cost is fixed at $3.1 million per year. The anticipated sales price of the company could be $2 million if the interest rate is 7%, or as much as $2.5 million if the rate is 15%, but will most likely be about $2.5 million at a rate of 10% per year. Is the decision to move forward with the acquisition sensitive to the loan's interest rate and salvage value estimates?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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