The Net Present Value, Mergers and Acquisitions
Michael D. Black
Module 5 CASE
Finance 501: Strategic Corporate Finance
Professor: Walter Witham
June 15, 2012
Net Present Value, Mergers and Acquisitions
Financial managers must understand the value of dollars invested today in order to make decisions as to what capital ventures are worth pursuing for business growth. The money a business is willing to invest in new equipment or expansion opportunities must provide positive cash flows. This revenue can be earned through operational income growth or cutting costs resulting in savings. One of the purposes of this paper is to explain the concept of Net Present Value to Micron shareholders so they have an understanding whether to vote in favor or against the company taking on a new project costing $3,219,000. The next topic for analysis is whether a merger between Elpida Memory, Micron Technology and Nanya Technology will benefit shareholders for each company. Lastly, I’ll share what learning objectives I have mastered.
Net Present Value, Mergers and Acquisitions
Financial managers must understand the value of a dollar invested today in order to make decisions as to what capital ventures/projects the company should engage in to expand business operations, earn a profit and increase shareholder wealth. The idea that a dollar today is worth more than a dollar in the future is true, because a dollar wisely invested today can be used to generate future earnings. The money a business is willing to invest in new equipment or expansion opportunities must provide positive cash flows. It doesn’t matter whether these cash flows are earned through operational activities or cost cutting measures but that they add value to the company. Two approaches to making capital budgeting decisions use discounted cash flows. “One is the net present value method and the other is the internal rate of return method-also called the time adjusted rate of return method”(McCoy & Frieder, 2005). For purposes of this paper I will explain the concept of Net Present Value to Micron shareholders so they have an understanding whether to vote in favor or against the company taking on the new project costing $3,219,000. What is Net Present Value?
In capital budgeting decisions, the focus is on cash flows and not on accounting net income. “The reason is that accounting net income is based on accruals that ignore the timing of cash flows into and out of an organization” (Hanley, n.d.). From a capital budgeting standpoint, the timing of cash flows is important, since a dollar received today is more valuable than a dollar received in the future. Therefore, even though accounting net income is useful for many things, it is not ordinarily used in discounted cash flow analysis. Instead of determining accounting net income, the manager concentrates on identifying the specific cash flows of the investment project-referred to as Net present value. In laymen’s terms, Net present value is the difference between a project’s cash inflows compared to the present value of the project’s cash outflows. It is a way to help financial managers and shareholders decide whether or not to invest in a project by purely looking at the projected cash inflows and outflows. Here are a few types of cash inflows and outflows common in business investment projects. “Cash inflows are considered to be incremental revenues earned, reduction in costs, and salvage value of equipment and release of working capital. While cash outflows are initial investment cost, repairs, maintenance, increased working capital needs for project and incremental operating costs” (Crossman & Needles, 2008). Now back to how Net Present Value helps managers decide whether to take on or forgo a project. A positive net present value means that the project's return exceeds the discount rate. A negative net present value means that...
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Hanley, T. H, "The Competitive State of the U.S. Commercial Banking Industry," CS First Boston, Retrieved June 14, 2012 from http://www.albion.com
McCoy J.B & Frieder L.A, “BottomLine Banking, (Chicago: Probus Publishing Co., 2005)
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