Question

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%.

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Answer #1

Suppose the Time is 10 years, NPV calculation is given below:

Year Initial Cost Revenue Operational cost Working capital Net Cash Flow Discount Factor CF*DF
0 400.000 -400.000 1.0000 -400.00
1 100.000 45.000 0.000 55.000 0.8696 47.83
2 200.000 90.000 5.000 105.000 0.7561 79.40
3 205.000 92.250 0.250 112.500 0.6575 73.97
4 210.125 94.556 0.256 115.313 0.5718 65.93
5 215.378 96.920 0.263 118.195 0.4972 58.76
6 220.763 99.343 0.269 121.150 0.4323 52.38
7 226.282 101.827 0.276 124.179 0.3759 46.68
8 231.939 104.372 0.283 127.283 0.3269 41.61
9 237.737 106.982 0.290 130.466 0.2843 37.09
10 243.681 109.656 0.297 133.727 0.2472 33.06
NPV 136.70
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