Present Value
Net present Value, Mergers and acquisitions
Abstract
Main objective of undertaking this to report was learn about NPV present value (NPV) method to make capital budgeting decision(Google NEW Project) and success factors involved in mergers and acquisitions(Google-Groupon Case).
Answers to the Assignments
Part I: Google should go ahead with the new project.
Part-II: Google’s acquisition of Groupon would have been win -win situation for both corporations
Now I will discuss both parts in detail below.
Part I: Capital Budgeting
Capital budgeting is the process of making long-term planning decision relating to planning for capital assets as to whether or not money should be invested in the long term projects (en.wikipedia.com). Decisions like obtaining new facilities or purchase or new machinery to expand their business. It involves a financial analysis of the various alternative proposals regarding a capital expenditure and to select the best out of the several alternatives.
There are several methods of evaluating investment projects like NPV, IRR, Payback period and Profitability Index (www.investopedia.com). I will be discussing NPV and IRR for this assignment.
Net Present Value (NPV)
NPV is a method which uses discounted cash flow techniques. Net Present Value is equal to the difference between the Present Value (PV) of the future cash inflows over the immediate cash outflow (Initial Investment - I). Simply put NPV=PV-I (http://accountingexplained.com).
PV is calculated using the cost of capital (also called minimum required rate of return or hurdle rate) as the discount rate.
Decision Rule: If NPV of project is positive, it is accepted, otherwise it is rejected (www.investopedia.com). “Since NPV represents the contribution to the wealth of the shareholders maximizing NPV is congruent with the objective of investment decision making viz. maximization of shareholder wealth” (http://xa.zimg.com).
Advantages of NPV Method:
a) It
Abstract
Main objective of undertaking this to report was learn about NPV present value (NPV) method to make capital budgeting decision(Google NEW Project) and success factors involved in mergers and acquisitions(Google-Groupon Case).
Answers to the Assignments
Part I: Google should go ahead with the new project.
Part-II: Google’s acquisition of Groupon would have been win -win situation for both corporations
Now I will discuss both parts in detail below.
Part I: Capital Budgeting
Capital budgeting is the process of making long-term planning decision relating to planning for capital assets as to whether or not money should be invested in the long term projects (en.wikipedia.com). Decisions like obtaining new facilities or purchase or new machinery to expand their business. It involves a financial analysis of the various alternative proposals regarding a capital expenditure and to select the best out of the several alternatives.
There are several methods of evaluating investment projects like NPV, IRR, Payback period and Profitability Index (www.investopedia.com). I will be discussing NPV and IRR for this assignment.
Net Present Value (NPV)
NPV is a method which uses discounted cash flow techniques. Net Present Value is equal to the difference between the Present Value (PV) of the future cash inflows over the immediate cash outflow (Initial Investment - I). Simply put NPV=PV-I (http://accountingexplained.com).
PV is calculated using the cost of capital (also called minimum required rate of return or hurdle rate) as the discount rate.
Decision Rule: If NPV of project is positive, it is accepted, otherwise it is rejected (www.investopedia.com). “Since NPV represents the contribution to the wealth of the shareholders maximizing NPV is congruent with the objective of investment decision making viz. maximization of shareholder wealth” (http://xa.zimg.com).
Advantages of NPV Method:
a) It
References: http://accountingexplained.com/managerial/capital-budgeting/npv http://www.forbes.com/sites/timworstall/2012/12/08/is-google-to-buy-groupon-and-whats-fun-if-it-does/ http://www.bloomberg.com/news/2012-12-07/groupon-rises-as-much-as-23-biggest-intraday-gain-since-may.html http://www.bloomberg.com/news/2010-11-30/google-said-to-near-agreement-to-buy-groupon-for-6-billion.html http://www.investopedia.com/terms/c/capitalbudgeting.asp http://www.investopedia.com/terms/i/internal-rate-of-return-rule.asp http://xa.yimg.com/kq/groups/20999390/.../Capital+Budgeting