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12. Your firm is preparing to make an acquisition. The total purchase price will be...

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Finance

12. Your firm is preparing to make an acquisition. The total purchase price will be $100 million. $60 million will be paid from cash reserves. The remaining $40 million will be borrowed at a rate of 5.5%. This loan will be paid off by making equal payments at the end of each year for 15 years. Your company's marginal tax rate is 35%. You have been asked to calculate the NPV of the acquisition. How will the $40 million of borrowings affect your cash flows in year 2 of the project?

A. Annual principal and interest payment of $3,985,024 will be a negative cash flow discounted at the project discount rate

B. Annual interest payment of $2,101,824 will be a negative cash flow discounted at the project discount rate

C. The tax savings generated by the interest will be a positive cash flow discounted at the project discount rate

D. The loan will have no effect on the year 2 cash flows for purposes of estimating NPV

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