Net Present Value (NPV) method is one of the most
important methods which is used to make capital budgeting decisions by almost
every company. NPV method is important because it helps financial managers to
maximize shareholders’ wealth by making better capital budgeting decisions.
Suppose Google (.yahoo.com/q?s=goog&ql=1″>http://finance.yahoo.com/q?s=goog&ql=1) is considering a new project that will cost $2,425,000 (initial cash
outflow). The company has provided the following cash flow figures to you:
If Google’s cost of capital (discount rate) is
11%, what is the project’s net present value? Based on your analysis and
findings, what would you recommend to the executives and the shareholders of
Google? Should the project be accepted? The shareholders of Google would
also like to know the meaning of NPV concept.
You may use the following steps to calculate NPV:
1) Calculate present value (PV) of cash inflow
PV of CF = CF1 / (1+r)1 + CF2 / (1+r)2 + CF3 / (1+r)3+ CF4 / (1+r)4 + CF5 / (1+r)5
2) Calculate NPV
NPV = Total PV of
CF – Initial cash outflow
-Initial cash outflow + Total PV of CF
r = Discount rate (9%)
If you do not know how to use calculator, please
use the present value tables.
Rumors about potential mergers and acquisitions
are often a hot topic in the business press. There are rumors that Google is
considering acquiring Groupon(.yahoo.com/q?s=GRPN&ql=0″>http://finance.yahoo.com/q?s=GRPN&ql=0).
As you know from reading the material in the
background materials, mergers and acquisitions can potentially bring about
great rewards but also can potentially bring great risks and pitfalls. For
this assignment, do some research concerning the arguments both for and against
such an acquisition from a financial perspective. For this module we are
not so concerned with how consumers may fair, as this is an issue for the
government to consider if they have to approve this acquisition. Instead
you are considering this from the point of view of whether or not such an
acquisition would be a profitable undertaking that would add value to the
shareholders of two corporations (Google and Groupon).
The following article provides information on
Google’s potential acquisition of Groupon:
Lachapelle, T. (2012). Buying groupon hard for
anyone as growth slows: real m&a. Retrieved December, 2012 from.bloomberg.com/news/2012-12-11/buying-groupon-hard-for-anyone-as-growth-slows-real-m-a.html?link=mktw”>http://www.bloomberg.com/news/2012-12-11/buying-groupon-hard-for-anyone-as-growth-slows-real-m-a.html?link=mktw
But do not limit yourself to this
article. Use Proquest, EbscoWeb, and other sources in the
Cyberlibrary. Use various internet search engines such as
news.google.com for the latest news on this acquisition. Then write a five to
seven pages report for the shareholders of Google and Groupon by answering the
following questions and the questions in part I:
1) Do you think Google’s potential acquistion of
Groupon would add value to the shareholders of both corporations? Why or
2) Based on your analysis and findings (Part I
and Part II), what would you recommend to the shareholders of Google and
Groupon? Please explain your reasoning.
The main focus of this assignment will be
answering the questions above and the questions in part I.
In your answers to the primary questions in part
II, please respond to following issues:
●The impact on Google shareholders
●The impact on Groupon shareholders
●The financial conditions of both corporations
(do not forget to consider the new project proposed by Google in part I)
●Why might one combined Google/Grouponcompany be
more profitable than if they remained separate companies? In general, what
makes an acquisition successful?
●Potential pitfalls – might the combined entity
actually be less profitable than either company operating independently? What
are the risk factors with this potential acquisition?
In addition to making use of concepts from the
background materials for this module, feel free to use concepts from Modules
1-4 as well.
3) What do you perceive you have learned in the
Module 5 Case Assignment? Which of the following learning objectives do you
feel you have mastered?
☼Describe and apply net present value (NPV) method to make capital
☼Identify success factors in mergers and acquisitions
☼Explain and discuss financing options for financing mergers and
☼Apply principles of risk and valuation analysis to mergers and