Question

year	Cash flow(in billions)	Net income ( in billions)
2012	1.5	1
2013	2.5	2
2014	4	3
2015	5	2
2016	6 (includes 3.5b selling price)	1.5

Motorola Mobility LLC is a company that develops mobile devices. Headquartered in Chicago, Illinois, United States, the company was formed on January 4, 2011 by the split of Motorola Inc. into two separate companies; Motorola Mobility took on the company's consumer-oriented product lines, including its mobile phone business and its cable modems and set-top boxes for digital cable and satellite television services, while Motorola Solutions retained the company's enterprise-oriented product lines. Early 2012, Google decided to purchase Motorola mobility LLC for $12.5b. Google had a plan to keep Motorola mobility for 5 years. Google financial analysis team made the following forecasts:

Year Cash flow(in billions)
Net income (in billions) 2012 1.5 1 2013 2.5 2 2014 4 3 2015 3 2 2016 6 (includes 3.5b selling price) 1.5

And that the average book value of asset is $8b and Google’s required rate of return is 11%.

Using excel (make formulas viewable), calculate net present value (NPV) for the above investment decision. Would you accept or reject this investment decision? Why?

Answer 1

Price to acquire offered by Google $12.5 billion

Cash flow calculation:

Year	cash flow	Discount rate	Discounted Cash flow
2012	$1.5b	1/1.11=0.901	$1.3515b
2013	$2.5b	1/1.11^2=0.812	$2.03b
2014	$4b	1/1.11^3=0.731	$2.924b
2015	$5b	1/1.11^4=0.659	$3.295b
2016	$6b	1/1.11^5=0.593	$3.558b
		Total Discounted Cash flow	$13.154b

Net Present value = $13.154b - $12.5b = $0.654b

NPV as above is positive thus investment by Google can be considered into Motorola.

Notes:

1. Net income is ignored while calculating NPV as pure cash flows are necessary to calculate NPV

2. Cash flows given are considered to be after tax

3. Assets value is ignored while calculating NPV