Problem:
X partners want to make an offer to acquire a small firm that manufactures GPS. Every GPS sells for $200. The cost of manufacturing is $180 per unit. You expect to sell 30,000 units in the first year you acquire the firm and you project that this number will grow at 10% per year. An investment of $500000 in equipment is required every five year and the equipment depreciates linearly with zero salvage value at the end of year five( this firm wons brand new equipment at the time of acquisition). The cost of the equipment is expected to increase by 5% every year. Assume a 40% tax and a 16% cost of capital.
Required:
Question: Calculate the maximum price X should offer for acquisition. Ignore working capital.
Note: Show supporting computations in good form.