Aardvark Software,Inc.can purchase all the stock of Zebra Computer Services for $1,000,000 in cash.Zebra is expected to generate net after-tax cash flows of $100,000 per year for each of the next 10 years.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 net present value (NPV) of the cash flows from Zebra, discounted at any positive cost of capital, will be less than $1,000,000, making the purchase unattractive.