WWW has an opportunity to buy a nearby competitor Amazing Widgets Inc (AW) who currently produces a widget very similar to WWW’s product. The deal would be an outright purchase of the company, with all its current equipment, facilities, employees, assets and liabilities, and customer accounts.

Project B Costs and Cashflow Elements – Money Out

• AW has asked a price of $121 million, based on their assets, reputation, and annual total income/free cash flow. This number may be negotiable. If WWW did buy AW, the price would be due in year 0.

• AW’s current production capacity is similar to WWW’s . It might be possible to expand AW’s production but that is uncertain at this point and should not be included in your analysis.

Project B Costs and Cashflow Elements – Money In

• AW currently sells 23,000 widgets annually, at an ATC of $671 and a market price of $850.

• AW has $1.7 million in annual non-operating fixed costs (The CEO’s salary, the accounting department, etc) which could be eliminated if they are bought by WWW.

• An additional cost savings of $17 per widget could be obtained on AW’s production at any level by combining raw materials orders with WWW’s current orders.

Task

Make sure using NPV, IRR and simple breakeven using a cumulative cash flow curve.

• Using the data on AW’s production volume along with costs and prices per units, calculate AW’s actual NPV using the WACC rate for WWW. Remember that this is for an indefinite period so use the in-perpetuity model, as well as the TVM approach.
• Lay out the cashflow for a 20 year period for both the $121 million asking price in year Zero (0) and your NPV from the step above. Calculate an NPV and IRR for both cashflows.

• Develop a cumulative cashflow curve across the 20 years and show simple breakeven and maximum cost points for the cashflow you think most likely for Project B.

• Assess risks and describe how you can manage them/mitigate them.

• Consider intangibles that cannot be included in the cashflow and assess how important they are to this project/decision.