Question

In: Finance

They forecast new revenues of $100 million in the first year and $200 million in year...

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.

Solutions

Expert Solution

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%

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