As with any other merger analysis, we need to examine the present value of the incremental cashflows. The cash flow today from the acquisition is the acquisition costs plus the dividends paidtoday, or:Acquisition of Hybrid–$550,000,000Dividends from Hybrid$150,000,000Total–$400,000,000Using the information provided, we can determine the cash flows to Birdie Golf from acquiringHybrid Golf. All earnings not retained are paid as dividends, so the cash flows for the next five yearswill be: Year 1Year 2Year 3Year 4Year 5
Dividends from Hybrid$38,400,000$12,800,000$29,400,000$41,400,000$59,000,000Terminal value of equity600,000,000Total$38,400,000$12,800,000$29,400,000$41,400,000$659,000,000To discount the cash flows from the merger, we must discount each cash flow at the appropriatediscount rate. The terminal value of the company is subject to normal business risk and should bediscounted at the cost of capital, while the dividends are equity cash flows, and as such, should bediscounted at the cost of equity. The present value of each year’s cash flows, along with theappropriate discount rate for each cash flow is: Discount rateYear 1Year 2Year 3Year 4Year 5
Dividends16.9%$32,848,589$9,366,578$18,403,643$22,168,806$27,025,856PV of value12.4%334,441,139Total$32,848,589$9,366,578$18,403,643$22,168,806$361,466,995And the NPV of the acquisition is: NPV = –$400,000,000 + 32,848,589 + 9,366,578 + 18,403,643 + 22,168,806 + 361,466,995 NPV = $44,254,610.07
CHAPTER 25 C83
C84 CASE SOLUTIONS
2.
Since the acquisition is a positive NPV project, the most Birdie would offer is to increase the currentcash offer by the current NPV, or:Highest offer = $550,000,000 + 44,254,610.07Highest offer = $594,254,610.07The highest share price is the total high offer price, divided by the shares outstanding, or:Highest share price = $594,254,610.07 / 8,000,000 sharesHighest share price = $74.28 3.
To determine the current exchange ratio which would make a cash offer and a...
...Netpresentvalue
In finance, the netpresentvalue (NPV) or netpresent worth (NPW) of a time series of cash flows, both incoming and outgoing, is defined as the sum of the presentvalues (PVs) of the individual cash flows. In case when all future cash flows are incoming (such as coupons and principal of a bond) and the only outflow of cash is the purchase price, the NPV is simply the PV of future cash flows minus the purchase price (which is its own PV). NPV is a central tool in discounted cash flow (DCF) analysis, and is a standard method for using the time value of money to appraise longterm projects. Used for capital budgeting, and widely throughout economics, finance, and accounting, it measures the excess or shortfall of cash flows, in presentvalue terms, once financing charges are met.
The NPV of a sequence of cash flows takes as input the cash flows and a discount rate or discount curve and outputting a price; the converse process in DCF analysis, taking as input a sequence of cash flows and a price and inferring as output a discount rate (the discount rate which would yield the given price as NPV) is called the yield, and is more widely used in bond trading.
Formula
Each cash inflow/outflow is discounted back to its presentvalue (PV). Then they are...
...we have concluded that this is a positive netpresentvalue project, and that AGI should proceed with the acquisition. Under Mr. Liedtke’s operating assumptions, we calculate the value of Mercury’s discounted cash flows to be $624.446 million, and the acquisition price to be $156.643 million, yielding a netpresentvalue of $467,804 for AGI. Our calculations indicate that this project becomes even more attractive financially when potential favorable synergies between AGI and Mercury are taken into account. A real options valuation (details below) involving inventory management and the women’s casual line indicates that an additional $22.365 million of value would be created by the successful implementation of fairly simple operating synergies in those two areas alone. Considering that far more possible synergies and savings are a possibility for AGI and Mercury postacquisition, we believe this acquisition would be an appropriate strategic move for AGI to improve its own performance and to compete on a more level playing field with the larger companies in the industry. Methodology/Supporting Assumptions To estimate the price of acquiring Mercury, we averaged the P/E multiples of comparable companies in the industry and applied that multiple to Mercury’s 2006 net income to arrive at a likely purchase price. P/E was used because we believe it is the...
...commercial base of sufficient scale to compete as a global automaker.
The Fiat group after the entered in the American market with the acquisition of the quota of majority of Crysler is found again of forehead, over that to a new market, also to a new coin with all those that can be the risks over how commercial also those financial. Nevertheless, right now, the exchange rate between these two currencies is 1 euro =1.3118 dollars so in order to make easier the case we will use 1.31 to round it up.
The politics of the Group related to the management of the risk of change foresee, as a rule, the coverage of the future commercial flows that you/they will have bookkeeping demonstration within 12 months and of the orders acquired (or committed in progress) to put aside from their expiration. It is reasonable to believe that the relative effect of coverage suspended in the Reserve of cash flow hedge will primarily be in relief to economic account in the following exercise.
The Group is exposed to consequential risks by the variation of the rates of change, that you/they can influence on its economic result and on the value of the clean patrimony. Particularly:
Whereas the societies of the Group sustain costs denominated in different currencies by those of denomination of the respective proceeds, the variation of the rates of change can influence the Result operational of such societies. In 2012, the general amount of the commercial flows...
...Examples Of NetPresentValue (NPV), ROI and
Payback Analysis
Introduction
Terms and Definitions
NetPresentValue  Method of calculating the expected net monetary gain or loss from a project by discounting all expected future cash inflows and outflows to the present point in time.
Discount Rate  Also known as the hurdle rate or required rate of return, is the rate that a project must achieve in order to be accepted rather than rejected.
Return on Investment – Expected income divided by the amount originally invested
Payback Analysis – The number of years needed to recover the initial cash outlay.
Formulas
NetPresentValue = (t=1..n A * (1+r)t OR (t=1..n A/ (1+r)t
Where A = Cash flow
r = Required rate of return
t = year of cash flow
n = the nth year
Return On Investment = (Discounted Benefits – Discounted Costs) / Discounted Costs
Payback Period = Years taken to repay initial outlay .
Eg. Project Z Outlay = $ 4000
Yearly cash flows = $2000...
...thereafter). If TecOne investors want a 40 percent rate of return on their investment, calculate the venture’s presentvalue.
B. Now assume that the Year 6 cash flows are forecasted to be $900,000 in the stepping stone year and are expected to grow at an 8 percent compound annual rate thereafter. Assuming that the investors still want a 40 percent rate of return on their investment, calculate the venture’s presentvalue.
C. Now extend Part B one step further. Assume that the required rate of return on the investment will drop from 40 percent to 20 percent beginning in Year 6 to reflect a drop in operating or business risk. Calculate the venture’s presentvalue.
2. Assume the forecasted cash flows presented in Problem 1 for the TecOne Corporation venture also hold for the LowTec venture. However, investors in LowTec have an expected rate of return of 30 percent on their investment until Year 6 when the rate of return is expected to drop to 18 percent. The perpetuity growth rate for cash flows after Year 6 is expected to be 7 percent.
A. Determine the presentvalue for the LowTec venture.
B. If an outside investor offers to invest $1,500,000 dollars today, what percentage ownership in LowTec should be given to the new investor?
3. Ben Toucan, owner of the Aspen BrewPub and Restaurant, wants to determine the...
...Tesca team we were able to create a comprehensive capital budget and cash flow analysis for the proposed refrigerator project.
Through our analysis we found that the cost of capital of the project to be 13.487% and a Weighted Average Cost of Capital (WACC) to be at a value of 9.70%. Factoring in the WACC into our projections we found that if the demand maintains at an average rate the project will be at a positive NetPresentValue of $5,997,505.31 with an IRR of 13.21%, a profitability index of 8.84, and an approximate payback period of 6.84 years. Please see Exhibits below for a snapshot of the capital budget and NPV values.
This information seemed to be very promising for the project in general. However, our continued analysis showed the project to be very sensitive to the sales price per unit of the refrigerator. We used the average demand scenario to produce a sensitivity analysis and found that with just a 5% decrease in the sales price of the refrigerator the NPV quickly dipped into a negative value thus showing the project to be extremely sensitive to the sales price of the refrigerator.
Our scenario analysis also exposed a strong probability of the project giving a negative NetPresentValue and giving a probable low Internal Rate of Return of only 4.01%. This is mainly due to the projects sensitivity to the sales price of...
...
FINC5001 Capital Market and Corporate Finance

Workshop 5 – Capital Budgeting II
1. Basic Concepts Review
a) In applying NetPresentValue, what factors do we include, and what factors do we ignore?
Use cash flows not accounting income
Ignore
* sunk costs
* financing costs
Include
* opportunity costs
* side effects
* working capital
* taxation
* inflation
2. Practice Questions
a) After spending $3 million on research, Better Mousetraps has developed a new trap. The project requires an initial investment in plant and equipment of $6 million. This investment will be depreciated straightline over five years to a value of zero, but, when the project comes to an end in five years, the equipment can in fact be sold for $500,000. The firm believes that working capital at each date must be maintained at 10% of next year's forecasted sales. Production costs are estimated at $1.50 per trap and the traps will be sold for $4 each. (There are no marketing expenses.) Sales forecasts are given in the following table. The firm pays tax at 35% and the required return on the project is 12%. What is the NPV?

Figures in 000's  
Year  0  1  2  3  4  5 
Unit Sales   500  600  1,000  1,000  600 
Revenues   2,000  2,400  4,000  4,000  2,400 ...
...additional mutually exclusive projects, for Week’s four assignment, Team D will formulate answers to determine what between Project A and Project B each project’s payback period, netpresentvalue, and internal rate of return. In addition, the team will give an analysis of what caused the ranking conflict and which project should be accepted and why. With a final comment, the team will describe factors Caledonia must consider if they were doing a lease versus buy.
Cash flows associated with these projects
RRR = 11%
Year PROJECT A PROJECT B 11%
0 ($100,000) ($100,000)
1 32,000
2 32,000 0
3 32,000 0
4 32,000 0
5 32,000 $200,000
NPV $18,269 $18,690
Required rate of return on these projects is 11 percent
a. What is each project’s payback period?
Year Project A Project B PresentValue (PV) @ 11% Project A Project B
0 100,000 100,000 1 100000 100,000
1 32,000 0 0.90 28828 0
2 32,000 0 0.81 25971 0
3 32,000 0 0.73 23398 0
4 32,000 0 0.66 21079 0
5 32,000 200,000 0.59 18990 118690
Project a 100000/32,000=3.125 years
Project b 100,000/200,000=0.5 There was no cash flow for the first 4 years 4+0.5=4.5 years
Project A’s payback period is 3.125 years whereas Project B is 4.5 years.
b. What is each project’s netpresentvalue?
The NPV for Project A is $18,269, whereas the NPV...
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