Question
Two auto parts manufacturers have agreed to merge. By streamlining operations, the merger is projected to generate pretax cost savings of $63 million in the
Two auto parts manufacturers have agreed to merge. By streamlining operations, the merger is projected to generate pretax cost savings of $63 million in the first year, $118 million in the second year, $183 million in the third year, and thereafter growing at the rate of inflation. To achieve these cost savings an investment of $480 million must be made at the outset. Sales of redundant equipment and property are expected to bring in pretax gains of $63 million in the first year and $48 million in the second year. There is a high probability that these projections will materialize. The merged company's cost of capital is forecast at 9.6 percent; borrowing cost is expected to be 7.8 percent. Inflation is 2.5 percent.
What is the present value of savings? (Assume a marginal tax rate of 35 percent.)
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