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An investor has recieved offers from two companies, which want to be ac- quired. Company A's price is €2 million. Company B's price is €3 million. After analysis, the investor estimates that Company A's profitability is con- sistent with a perpetuity of €300,000 (in arrears) a year and that Company B's prospects are consistent with a perpetuity (in arrears) of €435,000 a year. The investor has a budget that limits acquisitions to a maximum purchase cost of €4 million. Their opportunity cost of capital relative to undertaking either project is 12% per annum. (a) Determine which company or companies (if any) they should purchase according to the NPV measure. [4 marks) (b) Determine which company or companies (if any) they should purchase according the IRR measure. [4 marks) (c) State which company or companies (if any) they should purchase. Justify your answer
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