As a senior vice president of a major consumer productscorporation, you have been asked to review the following investmentand advise the CEO whether it should be pursued. The investmentinvolves buying a bottle manufacturer and making it a subsidiary ofyour beer division. The acquisition will benefit the firm byproviding a reliable internal source of bottles. The acquisitionprice will be $3,500,000. The bottle company has tangible assets of$2,500,000 and debt of $1,000,000 which must be paid off by theparent corporation (for a total of $4,500,000 in cash outlays). Ifthe transaction occurs, the beer division will also acquire anintangible asset of $2,000,000 to reflect the premium paid for thebottler. That intangible asset must be amortized over five years,resulting in an expense of $400,000 per year. The company will alsohave depreciation expense of $200,000 per year for the next tenyears on the bottler's property, plant, and equipment. No newequipment will need to be purchased during the operating life ofthe bottling plant. The company would have to make some changes atthe bottling plant in the first year following the acquisition tooptimize it for producing bottles for its beer plant. Those changeswill cost $300,000 (and will be expensed immediately).
On the plus side, the bottling plant will produce 20 millionbottles per year at a variable cost of $0.12 per bottle and a fixedoutlay cost of $1,500,000 per year. Currently, the beer divisionpays $0.25 per bottle and has sufficient volume that it can use asmany bottles as the bottling plant can produce. The bottling plantis expected to operate for ten years following acquisition beforeit becomes obsolete. At that point, it can be scrapped and the landsold, yielding $1,000,000 (received in December 2028), for a gainon sale of $500,000.
If the firm buys the bottler, the transaction will take place onDecember 31, 2018, with the new operations affecting the companystarting in 2019. By convention, costs and benefits receivedthroughout a year are treated for present value purposes asoccurring at the end of that year. There are no taxes and thefirm's discount rate is 10 percent.
Question:
Determine the net present value and NPVI for the corporation ifit buys the bottling company. (Use 2018 as year 0.)
*Make sure solution is detailed and can be seen clearly.*
As a senior vice president of a major consumer productscorporation, you have been asked to review the following investmentand advise the CEO whether it should be pursued. The investmentinvolves buying a bottle manufacturer and making it a subsidiary ofyour beer division. The acquisition will benefit the firm byproviding a reliable internal source of bottles. The acquisitionprice will be $3,500,000. The bottle company has tangible assets of$2,500,000 and debt of $1,000,000 which must be paid off by theparent corporation (for a total of $4,500,000 in cash outlays). Ifthe transaction occurs, the beer division will also acquire anintangible asset of $2,000,000 to reflect the premium paid for thebottler. That intangible asset must be amortized over five years,resulting in an expense of $400,000 per year. The company will alsohave depreciation expense of $200,000 per year for the next tenyears on the bottler's property, plant, and equipment. No newequipment will need to be purchased during the operating life ofthe bottling plant. The company would have to make some changes atthe bottling plant in the first year following the acquisition tooptimize it for producing bottles for its beer plant. Those changeswill cost $300,000 (and will be expensed immediately).
On the plus side, the bottling plant will produce 20 millionbottles per year at a variable cost of $0.12 per bottle and a fixedoutlay cost of $1,500,000 per year. Currently, the beer divisionpays $0.25 per bottle and has sufficient volume that it can use asmany bottles as the bottling plant can produce. The bottling plantis expected to operate for ten years following acquisition beforeit becomes obsolete. At that point, it can be scrapped and the landsold, yielding $1,000,000 (received in December 2028), for a gainon sale of $500,000.
If the firm buys the bottler, the transaction will take place onDecember 31, 2018, with the new operations affecting the companystarting in 2019. By convention, costs and benefits receivedthroughout a year are treated for present value purposes asoccurring at the end of that year. There are no taxes and thefirm's discount rate is 10 percent.
Question:
Determine the net present value and NPVI for the corporation ifit buys the bottling company. (Use 2018 as year 0.)
*Make sure solution is detailed and can be seen clearly.*
