RiverRocks realizes that it will have to raise the financing for the acquisition

Question

RiverRocks realizes that it will have to raise the financing for the acquisition of Raft Adventures by issuing new debt and equity

RiverRocks realizes that it will have to raise the financing for the acquisition of Raft Adventures by issuing new debt and equity. The acquisition project has a net present value of $36.36 million. The firm estimates that the direct issuing costs will come to $6.66 million. How should it account for these costs in evaluating the project? Should RiverRocks proceed with the project? How should it account for these costs in evaluating the project? (Select the best choice below.) A. The direct issuing costs should be included as a direct cost and should be amortized over the life of the project. O B. The direct issuing costs should be included as a direct cost of the acquisition, ie, NPV= $36.36 million +$6.66 million = $43.02 million ° C. The direct issuing costs should be included as a direct cost of the acquisition, ie, NPV= $36.36 million-$6.66 million = $29.70 million D. The direct issuing costs should not be included as a direct cost of the acquisition because it is a sunk cost. Should RiverRocks go ahead with the project? (Select from the drop-down menu.) I go ahead with the project.

Explanation / Answer

Option C i.e. Direct issuing costs should be included as direct cost of the acquisition and NPV will be 36.36-6.66 = 29.7million. Because, the issuing costs are directly attributable to the acquisition and the cash is entirely uotflowing in at T0 itself.

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