Marcal Corp is considering the purchase of an electronics company, which would require an initial investment of $500 million. Marcal estimates of the electronics company would provide net cash flows of $78 million at the end of each of the next 20 years. The cost of capital for the electronics company is 15%.

a. Calculate NPV. Should Marcal purchase the electronics company? Why?

b. Cash flows in years 1 to 20 might be $65 million per year or $90 million per year, with a 50% probability of each outcome. Because of the nature of the purchase contract, Marcal can sell the company two years after purchase (at Year 2 in this case) for $450 million if it no longer wants to own it. Does decision-tree analysis indicate that it makes sense to purchase the electronics company? Again, assume that all cash flows are discounted at 15%. (NPV calculation required.)

c. Marcal can wait for 1 year and find out whether the cash flows will be $50 million per year or $90 million per year before deciding to purchase the company. If it waits to purchase, Marcal can no longer sell the company for $450 million 2 years after purchase. Does decision-tree analysis indicate that it makes sense to purchase the electronics company? If so, when? Again, assume that all cash flows are discounted at 15%. (NPV calculation required)

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