Finance 6723 | Corporate Financial Management Capital Investment Valuation Case Basic synopsis: Your firm may purchase certain assets from a struggling competitor. The competitor is asking $50,000,000 for the assets. Last year, the assets produced revenues of $15,000,000. Revenues earned in the next year (i.e., year 1) and in future years are estimated using the information in the table below. Your staff expects that the following assumptions will hold over the operating period: The assets will be viable for another 10 years but will be worthless at the end of the 10 year period The assets are qualified by the IRS for depreciation using the straight-line method The firm will have a tax rate of 20% Your staff has also identified three key areas of uncertainty, which include Worst-Case Base-Case Best-Case Cash Expenses as 60% 55% 45% a % of Revenues WACC 20% 15% 8% Revenue Growth -10% 0% Rate Probability 10% 80% 10% 7% For this case, address the following goals (each goal should be shown in a separate worksheet in an Excel workbook; provide labels on each worksheet): Goal 1- Develop the annual pro forma after-tax cash flow statement for each scenario. Goal 2- Calculate the NPV and IRR for each scenario. Within the Goal 2 worksheet, discuss/interpret the NPV and IRR values that you have calculated in terms of whether the acquisition should be accepted or rejected. Goal 3- Use the probability distribution given along with your estimates from Goals 1 and 2 to calculate the expected value of the NPV and IRR for acquiring the assets. Interpret the expected values for both capital budgeting measures (compare your estimate of the expected value of the IRR to a benchmark IRR of 14.8%). Goal 5- Discuss three ways in which your financing modeling assumptions may be incorrect and state the associated impact on the ATCFs, NPV and IRR. Your discussion should be around 250 words in lenght. Proof read before submitting. Finance 6723 | Corporate Financial Management Capital Investment Valuation Case Basic synopsis: Your firm may purchase certain assets from a struggling competitor. The competitor is asking $50,000,000 for the assets. Last year, the assets produced revenues of $15,000,000. Revenues earned in the next year (i.e., year 1) and in future years are estimated using the information in the table below. Your staff expects that the following assumptions will hold over the operating period: The assets will be viable for another 10 years but will be worthless at the end of the 10 year period The assets are qualified by the IRS for depreciation using the straight-line method The firm will have a tax rate of 20% Your staff has also identified three key areas of uncertainty, which include Worst-Case Base-Case Best-Case Cash Expenses as 60% 55% 45% a % of Revenues WACC 20% 15% 8% Revenue Growth -10% 0% Rate Probability 10% 80% 10% 7% For this case, address the following goals (each goal should be shown in a separate worksheet in an Excel workbook; provide labels on each worksheet): Goal 1- Develop the annual pro forma after-tax cash flow statement for each scenario. Goal 2- Calculate the NPV and IRR for each scenario. Within the Goal 2 worksheet, discuss/interpret the NPV and IRR values that you have calculated in terms of whether the acquisition should be accepted or rejected. Goal 3- Use the probability distribution given along with your estimates from Goals 1 and 2 to calculate the expected value of the NPV and IRR for acquiring the assets. Interpret the expected values for both capital budgeting measures (compare your estimate of the expected value of the IRR to a benchmark IRR of 14.8%). Goal 5- Discuss three ways in which your financing modeling assumptions may be incorrect and state the associated impact on the ATCFs, NPV and IRR. Your discussion should be around 250 words in lenght. Proof read before submitting
