Question

In: Finance

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

Your firm may purchase certain assets from a struggling competitor. The competitor is asking $50,000,000 for the assets. Last year, the assets produced revenues of $15,000,000. Revenues earned in the next year (i.e., year 1) and in future years are estimated using the information in the table below.

Your staff expects that the following assumptions will hold over the operating period:

  • The assets will be viable for another 10 years but will be worthless at the end of the 10 year period
  • The assets are qualified by the IRS for depreciation using the straight-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%

Develop the annual pro forma after-tax cash flow statement for each scenario.

Note: I am pretty sure the other "experts" who answered the question previously had major flaws in their math.

Solutions

Expert Solution

a] BASE CASE [Growth rate = 0%]: 0 1 2 3 4 5 6 7 8 9 10
Revenue $ 1,50,00,000 $1,50,00,000 $ 1,50,00,000 $ 1,50,00,000 $ 1,50,00,000 $ 1,50,00,000 $ 1,50,00,000 $ 1,50,00,000 $   1,50,00,000 $   1,50,00,000
Cash expenses [55%] $     82,50,000 $    82,50,000 $    82,50,000 $     82,50,000 $     82,50,000 $      82,50,000 $      82,50,000 $     82,50,000 $       82,50,000 $       82,50,000
Depreciation [50000000/10] $     50,00,000 $    50,00,000 $    50,00,000 $     50,00,000 $     50,00,000 $      50,00,000 $      50,00,000 $     50,00,000 $       50,00,000 $       50,00,000
NOI $     17,50,000 $    17,50,000 $    17,50,000 $     17,50,000 $     17,50,000 $      17,50,000 $      17,50,000 $     17,50,000 $       17,50,000 $       17,50,000
Tax at 20% $       3,50,000 $      3,50,000 $       3,50,000 $       3,50,000 $       3,50,000 $        3,50,000 $        3,50,000 $       3,50,000 $         3,50,000 $         3,50,000
NOPAT $     14,00,000 $    14,00,000 $    14,00,000 $     14,00,000 $     14,00,000 $      14,00,000 $      14,00,000 $     14,00,000 $       14,00,000 $       14,00,000
Add: Depreciation $     50,00,000 $    50,00,000 $    50,00,000 $     50,00,000 $     50,00,000 $      50,00,000 $      50,00,000 $     50,00,000 $       50,00,000 $       50,00,000
OCF $     64,00,000 $    64,00,000 $    64,00,000 $     64,00,000 $     64,00,000 $      64,00,000 $      64,00,000 $     64,00,000 $       64,00,000 $       64,00,000
Capital expenditure $     5,00,00,000
Annual after tax cash flow $   -5,00,00,000 $     64,00,000 $    64,00,000 $    64,00,000 $     64,00,000 $     64,00,000 $      64,00,000 $      64,00,000 $     64,00,000 $       64,00,000 $       64,00,000
b] BEST CASE [Growth rate = 7%]: 0 1 2 3 4 5 6 7 8 9 10
Revenue $ 1,60,50,000 $1,71,73,500 $ 1,83,75,645 $ 1,96,61,940 $ 2,10,38,276 $ 2,25,10,955 $ 2,40,86,722 $ 2,57,72,793 $   2,75,76,888 $   2,95,07,270
Cash expenses [45%] $     72,22,500 $    77,28,075 $    82,69,040 $     88,47,873 $     94,67,224 $ 1,01,29,930 $ 1,08,39,025 $ 1,15,97,757 $   1,24,09,600 $   1,32,78,272
Depreciation [50000000/10] $     50,00,000 $    50,00,000 $    50,00,000 $     50,00,000 $     50,00,000 $      50,00,000 $      50,00,000 $     50,00,000 $       50,00,000 $       50,00,000
NOI $     38,27,500 $    44,45,425 $    51,06,605 $     58,14,067 $     65,71,052 $      73,81,025 $      82,47,697 $     91,75,036 $   1,01,67,289 $   1,12,28,999
Tax at 20% $       7,65,500 $      8,89,085 $    10,21,321 $     11,62,813 $     13,14,210 $      14,76,205 $      16,49,539 $     18,35,007 $       20,33,458 $       22,45,800
NOPAT $     30,62,000 $    35,56,340 $    40,85,284 $     46,51,254 $     52,56,841 $      59,04,820 $      65,98,158 $     73,40,029 $       81,33,831 $       89,83,199
Add: Depreciation $     50,00,000 $    50,00,000 $    50,00,000 $     50,00,000 $     50,00,000 $      50,00,000 $      50,00,000 $     50,00,000 $       50,00,000 $       50,00,000
OCF $     80,62,000 $    85,56,340 $    90,85,284 $     96,51,254 $ 1,02,56,841 $ 1,09,04,820 $ 1,15,98,158 $ 1,23,40,029 $   1,31,33,831 $   1,39,83,199
Capital expenditure $     5,00,00,000
Annual after tax cash flow $   -5,00,00,000 $     80,62,000 $    85,56,340 $    90,85,284 $     96,51,254 $ 1,02,56,841 $ 1,09,04,820 $ 1,15,98,158 $ 1,23,40,029 $   1,31,33,831 $   1,39,83,199
c] WORST CASE [Growth rate = -10%]: 0 1 2 3 4 5 6 7 8 9 10
Revenue $ 1,35,00,000 $1,21,50,000 $ 1,09,35,000 $     98,41,500 $     88,57,350 $      79,71,615 $      71,74,454 $     64,57,008 $       58,11,307 $       52,30,177
Cash expenses [60%] $     81,00,000 $    72,90,000 $    65,61,000 $     59,04,900 $     53,14,410 $      47,82,969 $      43,04,672 $     38,74,205 $       34,86,784 $       31,38,106
Depreciation [50000000/10] $     50,00,000 $    50,00,000 $    50,00,000 $     50,00,000 $     50,00,000 $      50,00,000 $      50,00,000 $     50,00,000 $       50,00,000 $       50,00,000
NOI $       4,00,000 $     -1,40,000 $     -6,26,000 $   -10,63,400 $   -14,57,060 $    -18,11,354 $    -21,30,219 $   -24,17,197 $     -26,75,477 $     -29,07,929
Tax at 20% $           80,000 $        -28,000 $     -1,25,200 $      -2,12,680 $      -2,91,412 $       -3,62,271 $      -4,26,044 $      -4,83,439 $        -5,35,095 $       -5,81,586
NOPAT $       3,20,000 $     -1,12,000 $     -5,00,800 $      -8,50,720 $   -11,65,648 $    -14,49,083 $    -17,04,175 $   -19,33,757 $     -21,40,382 $     -23,26,343
Add: Depreciation $     50,00,000 $    50,00,000 $    50,00,000 $     50,00,000 $     50,00,000 $      50,00,000 $      50,00,000 $     50,00,000 $       50,00,000 $       50,00,000
OCF $     53,20,000 $    48,88,000 $    44,99,200 $     41,49,280 $     38,34,352 $      35,50,917 $      32,95,825 $     30,66,243 $       28,59,618 $       26,73,657
Capital expenditure $     5,00,00,000
Annual after tax cash flow $   -5,00,00,000 $     53,20,000 $    48,88,000 $    44,99,200 $     41,49,280 $     38,34,352 $      35,50,917 $      32,95,825 $     30,66,243 $       28,59,618 $       26,73,657

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