In: Finance
They forecast new revenues of $100 million in the first year and $200 million in year 2, growing at 2.5% per year thereafter. The cost of goods underlying these new revenues is 45 percent of the revenues.
To achieve these synergies will require an investment of $400 million initially, and 5% of the added revenue each year, to fund working capital growth.
Find the net present value of these synergies using a discount rate of 15% and a marginal tax rate of 40%.
Please show how answers are derived.
Year1 | Year2 | Year3 | Year4 | Year5 | ||
Cash outflow | (400,000,000) | |||||
Revenue (A) | 100,000,000 | 200,000,000 | 205,000,000 | 210,125,000 | ||
Cost as 45% of revenue © | 45% | (400,000,000) | 45,000,000 | 90,000,000 | 92,250,000 | 94,556,250 |
Added 5% revenue (B) | 5% | 5,000,000 | 10,000,000 | 10,250,000 | 10,506,250 | |
Total Revenue (A+B) | 0 | 105,000,000 | 210,000,000 | 215,250,000 | 220,631,250 | |
PBT (A+B-C) | (400,000,000) | 60,000,000 | 120,000,000 | 123,000,000 | 126,075,000 | |
LESS: TAX | 40% | 24,000,000 | 48,000,000 | 49,200,000 | 50,430,000 | |
Profit after tax | (400,000,000) | 36,000,000 | 72,000,000 | 73,800,000 | 75,645,000 | |
NPV | (222,478,335.91) | |||||
DISCoUNT RATE | 15% |