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QX Company is considering the acquisition of an operating division from a multinational company. If it acquires the division, it will invest an additional Rs.12 million immediately to modernize equipment. It has been estimated that the annual after-tax cash flows after the acquisition and additional investment will be as follows:
Year Rs. million
1 11
2 12
3 13
4 14
5 onwards (per year) 7
The cash flow at time 5 is expected to grow at 5% in perpetuity
An appropriate after-tax cost of capital for valuing the acquisition is 7.5%.
Requirement:
Estimate the maximum amount that QX Company should be prepared to pay to acquire the operating division from the multinational company.
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