Your firm may purchase certain assets from a struggling competitor. The competitor is asking $50,000,000 for...

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Finance

Your firm may purchase certain assets from a strugglingcompetitor. The competitor is asking $50,000,000 for the assets.Last year, the assets produced revenues of $15,000,000. Revenuesearned in the next year (i.e., year 1) and in future years areestimated using the information in the table below.
Your staff expects that the following assumptions will hold overthe operating period:
The assets will be viable for another 10 years but will beworthless at the end of the 10 year period
The assets are qualified by the IRS for depreciation using thestraight-line method
A constant 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 a % of Revenues
60%
55%
45%
WACC
20%
15%
8%
Revenue Growth Rate
-10%
0%
7%
Probability
10%
80%
10%
For this case, address the following goals (each goalshould be shown in a separate worksheet in an Excel workbook;provide labels on each worksheet):
Goal 2- Calculate the NPV and IRR for each scenario.Within the Goal 2 worksheet, discuss/interpret the NPV and IRRvalues that you have calculated in terms of whether the acquisitionshould be accepted or rejected.

Answer & Explanation Solved by verified expert

4.1 Ratings (757 Votes)

GOAL 2 BASE CASE WACC 15 Annual after tax cash flow 50000000 6400000 6400000 6400000 6400000 6400000 6400000 6400000 6400000 6400000 6400000 PVIF at 15 1 0869565 0756144 0657516 0571753 0497177 0432328 0375937 0326902 0284262 0247185 PV at 15 50000000 5565217 4839319 4208104 3659221 3181931 2766897 2405997 2092171 1819279 1581982 17879881 NPV 17879881 IRR IRR is that discount rate for which NPV 0 It has to be found out by trial and error by trying different discount rates to get 0 NPV See Answer

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	Worst-Case	Base-Case	Best-Case
Cash Expenses as a % of Revenues	60%	55%	45%
WACC	20%	15%	8%
Revenue Growth Rate	-10%	0%	7%
Probability	10%	80%	10%