Your company has done very well. To take it to the next level, you need to acquire another smaller company that has manufacturing capabilities you do not have. You are evaluating a possible company with a value of $2,500,000. You expect that if you acquire the value of your company will increase at 5% per year. Your company is currently valued at $15,000,000 and your investment timeframe is 4 years. If the MARR for the company is 3%, what is the present value net gain (or loss) associated with acquiring the company? $-827500 $-101050 $164474 $378740 $427598

Your company has done very well. To take it to the next level, you need to acquire another smaller company that has manufacturing capabilities you do not have. You are evaluating a possible company with a value of $2,500,000. You expect that if you acquire the value of your company will increase at 5% per year. Your company is currently valued at $15,000,000 and your investment timeframe is 4 years. If the MARR for the company is 3%, what is the present value net gain (or loss) associated with acquiring the company? $-827500 $-101050 $164474 $378740 $427598

Name: Your company has done very well. To take it to the next level, you ne
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Description: Your company has done very well. To take it to the next level, you need to acquireanother smaller company that has manufacturing capabilities you do not have. You areevaluating a possible company with a value of $2,500,000. You expect that if youacq

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter11: Capital Budgeting Decisions

Section: Chapter Questions

Problem 5PA: Falkland, Inc., is considering the purchase of a patent that has a cost of $50,000 and an estimated...

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Falkland, Inc., is considering the purchase of a patent that has a cost of $50,000 and an estimated revenue producing life of 4 years. Falkland has a cost of capital of 8%. The patent is expected to generate the following amounts of annual income and cash flows: A. What is the NPV of the investment? B. What happens if the required rate of return increases?
Gina Ripley, president of Dearing Company, is considering the purchase of a computer-aided manufacturing system. The annual net cash benefits and savings associated with the system are described as follows: The system will cost 9,000,000 and last 10 years. The companys cost of capital is 12 percent. Required: 1. Calculate the payback period for the system. Assume that the company has a policy of only accepting projects with a payback of five years or less. Would the system be acquired? 2. Calculate the NPV and IRR for the project. Should the system be purchasedeven if it does not meet the payback criterion? 3. The project manager reviewed the projected cash flows and pointed out that two items had been missed. First, the system would have a salvage value, net of any tax effects, of 1,000,000 at the end of 10 years. Second, the increased quality and delivery performance would allow the company to increase its market share by 20 percent. This would produce an additional annual net benefit of 300,000. Recalculate the payback period, NPV, and IRR given this new information. (For the IRR computation, initially ignore salvage value.) Does the decision change? Suppose that the salvage value is only half what is projected. Does this make a difference in the outcome? Does salvage value have any real bearing on the companys decision?
You are considering investing in a project related to a new product opportunity. If you undertake the project immediately, you calculate the NPV will be $165,000. If you postpone the decision for one year, you will learn more about the relevant manufacturing process as well as the market for your product. If you wait one year, you expect with 80 percent likelihood competitors will enter the market and your NPV (in one year) will be - $20,000. With 20 percent likelihood, you will be the only market player and you will improve your production technology to create an NPV (in one year) of $400,000. The appropriate discount rate is 11 percent. Required: Calculate the expected NPV if you defer the project for one year, regardless of the potential scenario. Calculate the expected NPV if you strategically decide how to undertake your project. That is, if we find that competitors enter the market, we can decide not to enter. Interpret the difference in your answers to parts 1 and 2.
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Your startup has been doing well and you think you’re just a couple of years away from an M&A exit event. You assume you’ll be able to sell the company for about $50mm, the industry average. But you need to raise $3mm now to fund you until then. You’ve received three term sheets, all with the same premoney valuation of $9mm: which one is best, from the standpoint of maximizing the amount of money you will receive from the target exit, and what key reason(s) makes this most favorable? VC Firm: 1.5x participating preferred, no cap Angel Group: Convertible debt, converting at 25% discount to exit value, $18mm conversion value cap Family Office: 3x simple preferred with a $15mm cap
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Innovation Company is thinking about marketing a new software product. Upfront costs to market and develop the product are $5 million. The product is expected to generate profits of $1 million per year for 10 years. The company will have to provide product support expected to cost $100,000 per year in perpetuity. Assume all profits and expenses occur at the end of the year. (1) What is the NPV of this investment if the cost of capital is 6%? Should the firm undertake the project? Repeat the analysis for discount rates of 2% and 12%.(2) How many IRRs does this investment opportunity have? (3) Can the IRR rule be used to evaluate this investment? Explain.