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    Project Evaluation, Merger Gains and Costs

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    25. Project Evaluation.

    The following table presents sales forecasts for Golden Gelt Giftware. The unit price is $40. The unit cost of the giftware is $25.
    Year Unit Sales
    1 22,000
    2 30,000
    3 14,000
    4 5,000
    Thereafter 0
    It is expected that net working capital will amount to 20 percent of sales in the following year. For example, the store will need an initial (year-0) investment in working capital of .20 × 22,000 × $40 = $176,000. Plant and equipment necessary to establish the Giftware business will require an additional investment of $200,000. This investment will be depreciated using MACRS and a 3-year life. After 4 years, the equipment will have an economic and book value of zero. The firm's tax rate is 35 percent. What is the net present value of the project? The discount rate is 20 percent.

    Merger Gains and Costs.
    8. Merger Gains and Costs. Velcro Saddles is contemplating the acquisition of Pogo Ski Sticks, Inc. The values of the two companies as separate entities are $20 million and $10 million, respectively. Velcro Saddles estimates that by combining the two companies, it will reduce marketing and administrative costs by $500,000 per year in perpetuity. Velcro Saddles is willing to pay $14 million cash for Pogo. The opportunity cost of capital is 8 percent.
    a. What is the gain from merger?
    b. What is the cost of the cash offer?
    c. What is the NPV of the acquisition under the cash offer?
    -----------------------------------

    Attached you will find the PDF documents to some practice study problems that I am still trying to grasp and understand. These are the ones that I did not know how to do. Your help is greatly appreciated.

    Chapter 8: practice problem 25 on PDF document page 234

    Chapter 21: practice problem 8 on PDF document page 595

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    Solution Preview

    Please see the attached file.
    25. Project Evaluation. The following table presents sales forecasts for Golden Gelt Giftware. The unit price is $40. The unit cost of the giftware is $25.

    Year Unit Sales
    1 22,000
    2 30,000
    3 14,000
    4 5,000
    Thereafter 0

    It is expected that net working capital will amount to 20 percent of sales in the following year. For example, the store will need an initial (year-0) investment in working capital of .20 × 22,000 × $40 = $176,000. Plant and equipment necessary to establish the Giftware business will require an additional investment of $200,000. This investment will be depreciated using MACRS and a 3-year life. After 4 years, the equipment will have an economic and book value of zero. The firm's tax rate is 35 percent. What is the net present value of the project? The discount rate is 20 percent.

    Step 1: Calculate the after tax cash flow from operations

    Sale price= $40 per unit
    cost= $25 per unit
    Gross profit per unit= $15.00 =40-25

    Gross profit for 5 years

    Year Sales Gross profit @ 15 a unit
    0 0 0.00
    1 22,000 $330,000 $214,500 $23,331 $237,831
    2 30,000 $450,000 $292,500 $31,115 $323,615
    3 14,000 $210,000 $136,500 $10,367 $146,867
    4 5,000 $75,000 $48,750 $5,187 $53,937

    Step 2: Calculate the value of depreciation

    The equipment will be depreciated ...

    Solution Summary

    Answers 2 questions on a) Project Evaluation, b) Merger Gains and Costs.

    $2.19