What is the present value of the savings cash flows

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Reference no: EM133751279

Assignment

Your company has just initiated negotiations with BuyMeNow, Inc., but the deal is far from certain at this point. You have the job of determining if certain expected synergies with BuyMeNow will result in more value for your company's shareholders than if they just bought the stock of both companies separately.

You know the following:

1. Your team managers have determined there will be pretax cost savings of $75M in year 1 of the deal, and a constant $120M in every year after. These savings are expected to grow at the rate of inflation, which averages 3%.

2. Your marginal federal tax rate is 21% and the marginal state tax rate is 5%.

3. Your company expects to invest $3 billion into BuyMeNow to achieve these savings.

4. Starting in year 3, you will have to spend 8% of the pretax savings to sustain the rate of savings.

5. Your team managers have identified redundant assets between your company and BuyMeNow, and plan to sell them off over 3 years: $40M in year 1, $30M in year 2, and $15M in year 3.

6. Your team analyst has determined that these estimated cost savings are "rather certain" and so has determined the appropriate discount rate for the cash flows is your company's cost of debt at 5%.

Task

A. Present your analysis IN EXCEL using the same format as Exhibit 11.3 on page 335 of your text.

B. What is the Present Value of the savings cash flows?

C. What is the Internal Rate of Return (IRR) of the savings cash flows?

D. Based on your results, is this an acquisition your company should continue to pursue?

Reference no: EM133751279

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