Purchase a business that is a major supplier of key raw materials used by the co

Question

Purchase a business that is a major supplier of key raw materials used by the company in manufacturing its principal product.

The owner of the supplier firm has indicated that he would be willing to sell his business for $500,000. I expect this “vertical integration” of the company to result in reduced material costs totaling $75,000 annually for the next 15 years. I do not expect these savings to continue after 15 years.

Purchase RM Supplier Investment (Outflow) $500,000 Return Per Year (Inflow) $75,000 Discount Rate   = 10% Calculations Investment Outflow Year 1 Inflow $75,000 Year 2 Inflow $75,000 Year 3 Inflow $75,000 Year 4 Inflow $75,000 Year 5 Inflow $75,000 Year 6 Inflow $75,000 Year 7 Inflow $75,000 Year 8 Inflow $75,000 Year 9 Inflow $75,000 Year 10 Inflow $75,000 Year 11 Inflow $75,000 Year 12 Inflow $75,000 Year 13 Inflow $75,000 Year 14 Inflow $75,000 Year 15 Inflow $75,000 NPV Of Investment =

Explanation / Answer

Net present value= Present value of cash inflow-Present value of cash outflow

= (75000*7.60608)-500000

Net present value = 70456

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