VButlers Media Corporation (BMC) is a well-known media entity in Calgary, specializing in the Wireless Communication, Broad Band Internet Services, and Cable Television. It has been known for quite some time, that BMC would like to create Video on Demand platform for the distribution of its network programming, along with other licensed products; however the timing has never been right. You have been working for BMC in a Junior Analysts role for a year, when the opportunity to participate in a potential big project arises.

The Project

It appears that Clinkers Incorporated, a competitor in Edmonton, has been struggling for quite some time. The firm has posted Negative EPS numbers in each of the last three years (-$2.30, -$2.50, -$3.00), and over the three years its Market Capitalization has dropped from $3.8 Billion to $698 Million. Clinkers' Management Discussions & Analysis shows that senior management has become extremely concerned about its Debt Situation (D/E Ratio for 2016 was 2.65, compared to an industry average of 1.35). Market Analysts are predicting that without a serious capital infusion within the next three months, Clinkers Incorporated could be headed for Insolvency.

In 2012 Clinkers Incorporated decided to invest in the creation of a Video on Demand service called Clinkos. The initial investment was expected to be $100 Million, however project overruns resulted in a total investment of $180 Million. Clinko's is Clinkers Incorporated's highest performing division, and its only division to have a positive operation Income in 2019.

BMC's Vice President of IT believe that if BMC were to acquire Clinkos, they can finally have an on demand platform that is well established. The platform can then be used for Butlers programming library and marketed all over Canada.

The proposal

BMC will purchase Clinkos from Clinkers Incorporated at a straight cash price of $240 Million Dollars. To make the platform viable, Upgrades costing a total of $140 Million be required. The upgrades and the investment are not CCA eligible (No tax shield Calculation required in this project).

Incremental Cash Flows After 20 years it is determined that the Video on Demand will become obsolete with no salvage value.

Years.Incremental Cash Flow (Net of All Costs and expenses)

1-3.10,000,000

4-1024,000,000

11-1743,000,000

18-2012,500,000

REQUIRED

A. Prepare n NPV analysis for the outlined proposal. Calculate the NPV at discount rates of 10% to 16%. (40 Marks)

B. Graph your answer in Part A. (20 Marks)

C. Calculate the Internal Rate of Return. (10 Marks)

D. If you could either decrease the discount rate to 8% or increase the Incremental Cash flows by 10% for years 4 to 10 (from $24,000,000 to $26,400,000), which would you prefer based on calculation? (30 Marks)d