Question

JPMorgan (JPM) and Goldman Sachs (GS) are competing to sponsor an IPO. The cost of the IPO is listed in year 0 (t=0) and the expected revenue is listed for the next 5 years ($ in millions): JPM: ($7) in year 0; $2 in year 1; $1 in year 2; $2 in year 3; $3 in year 4 and $4 in year 5 GS: ($8) in year 0; $4 in years 1&2; $2 in year 3; $1 in year 4 and $0.5 in year 5 Calculate the NPV for JPM and GS if WACC is 15%? Would JPM or GS generate a higher return? Calculate the NPV for JPM and GS if WACC is 12%? Bonus: At what rate of return would JPM and GS generate the same return (calculate crossover rate)?

Answer 1

At WACC = 15%

	Computation of NPV					Computation of NPV
	JP Morgan (JPM)					Goldman Sachs (GS)
	Year	Cashflows	PVF@ 15 %	PV		Year	Cashflows	PVF@ 15 %	PV
A	0	$ (7,000,000)	1.0000	$ (7,000,000)		0	$ (8,000,000)	1.0000	$ (8,000,000)
		PV of Cash Outflows		$ (7,000,000)			PV of Cash Outflows		$ (8,000,000)
B	1	$    2,000,000	0.8696	$    1,739,130		1	$   4,000,000	0.8696	$    3,478,261
	2	$    1,000,000	0.7561	$        756,144		2	$   4,000,000	0.7561	$    3,024,575
	3	$    2,000,000	0.6575	$    1,315,032		3	$   2,000,000	0.6575	$    1,315,032
	4	$    3,000,000	0.5718	$    1,715,260		4	$   1,000,000	0.5718	$        571,753
	5	$    4,000,000	0.4972	$    1,988,707		5	$       500,000	0.4972	$        248,588
		PV of Cash Inflows		$    7,514,273			PV of Cash Inflows		$    8,638,210
C	NPV	= B-A		$ 514,273		NPV	= B-A		$ 638,210
	GS is having higher NPV, Hence, GS is generating more return.

At WACC =12%

	Computation of NPV					Computation of NPV
	JP Morgan (JPM)					Goldman Sachs (GS)
	Year	Cashflows	PVF@ 12 %	PV		Year	Cashflows	PVF@ 12 %	PV
A	0	$ (7,000,000)	1.0000	$ (7,000,000)		0	$ (8,000,000)	1.0000	$ (8,000,000)
		PV of Cash Outflows		$ (7,000,000)			PV of Cash Outflows		$ (8,000,000)
B	1	$    2,000,000	0.8929	$    1,785,714		1	$   4,000,000	0.8929	$    3,571,429
	2	$    1,000,000	0.7972	$        797,194		2	$   4,000,000	0.7972	$    3,188,776
	3	$    2,000,000	0.7118	$    1,423,560		3	$   2,000,000	0.7118	$    1,423,560
	4	$    3,000,000	0.6355	$    1,906,554		4	$   1,000,000	0.6355	$        635,518
	5	$    4,000,000	0.5674	$    2,269,707		5	$       500,000	0.5674	$        283,713
		PV of Cash Inflows		$    8,182,730			PV of Cash Inflows		$    9,102,996
	NPV	= B-A		$ 1,182,730		NPV	= B-A		$ 1,102,996

Computation of Cross Over Rate:

Year	Cashflows (JPM)	Cashflows (GS)	Cash flows(JPM - GS)
0	$       (7,000,000)	$      (8,000,000)	$        1,000,000
1	$         2,000,000	$         4,000,000	$     (2,000,000)
2	$         1,000,000	$         4,000,000	$     (3,000,000)
3	$         2,000,000	$         2,000,000	$                       -
4	$         3,000,000	$         1,000,000	$        2,000,000
5	$         4,000,000	$            500,000	$        3,500,000
		IRR =	13.10%