Aardvark Software, Inc. can purchase all the stock of Zebra Computer Services for $1,200,000 in cash. Zebra is expected to generate net after-tax cash flows of $100,000 per year for each of the next 12 years. Based solely on the cash flow analysis, Aardvark should
A) not purchase Zebra Computer Services.
B) purchase Zebra Computer Services.
C) purchase Zebra only if Aardvark's cost of capital is between 5% and 10%.
D) purchase Zebra only if Aardvark's cost of capital is above 10%.

Question

Quizplus · Accepted Answer

The total cash flows over 12 years ($100,000 x 12 = $1,200,000) equal the purchase price, meaning the investment breaks even without considering the time value of money. Therefore, Aardvark should not purchase Zebra based solely on this analysis.