Question

I computed 3 projects's accumulated value with cash flow. for the project 1 I got negative accumulated value, for the project 2 I got negative accumulated value. For project 3( company takes project 1 and 2 at the same time) I got positive accumulated value. I was wondering why the company takes project 1 and 2 at the same time can get positive accumulated value.... its kind of counterintuitive to me. Can you hepl me out? plz explain it as much as you can, ty!

Answer 1

When two projects are having negative accumulated value implies that, their expected cash flows failed to pay back the initial investments. Thus amount invested in these two companies is not worth to the expected benefit. Principles of accounting and as well finance at many instances requires that value of any investment must be lower of its cost of acquisition or future value of expected benefits.

The company - 3 which is accquiring these two loss making campanies might have paid a value lower than their individual cost of acquisitions. For example Project - 1 ......... Initial cost = 1000,000 and Project - 2 ......... Initial cost of 2000,000. Don't think that company - 3 taking these two companies shall be paying 3000,000. When it kowns the fact of negative accumations in the respective companies, company - 3 will be bargainning both loss making companies at discount price. As a result it happens that merged entity may be having positive accumulation.

Another important fact to be identified is impact of synergy benefits. Due to merger, there will lot of scope for cost saving due to internal and external economies of scale. This can also be the reason for change of negative to positive prospects of the merged company.