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Strategic Corporate Finance Mod 5 Case Assignment - Essay Example

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Strategic Corporate Finance Mod 5 Case Assignment

Net Present Value (NPV) method is one of the most important methods used to make capital budgeting decisions by businesses today. NPV method is important because it helps financial managers maximize shareholders’ wealth by making better capital budgeting decisions. Basically we can determine whether a project is worth investing in or not by comparing the present value of inflows and outflows discounted at the rate of cost of capital. If the PV of net flows is positive (PV of inflows is more than the PV of outflows over the life of the project), we consider it a good investment because it will increase shareholder wealth, and vice versa. In other words, must have a positive net inflow. In the given scenario, T-Mobile Corporation is considering a new project that will cost $3,219,000. This is the initial cash outflow. The company has provided the following cash flow figures: Year Cash Flow 0 -$3,219,000 1 350,000 2 939,000 3 1,122,000 4 500,000 5 400,000 We are told that T-Mobile’s cost of capital discount rate is 4%, and are required to calculate the project's net present value. PV of Cash Inflows = 350000/(1.04)1 + 939000/(1.04)2 + 1122000/(1.04)3 +500000/(1.04)4 + 400000/(1.04)5 350000/1.04 + 939000/1.0816 + 1122000/1.1248 + 500000/ 1.1698 + 400000/ 1.2166 336538.46 + 868158.28 + 997510.66 + 427423.49 + 328785.13 $2,958,416.02. NPV= PV of Inflows – PV of Outflows NPV =$2,958,416.02 – 3,219,000 NPV= (260,583.98) Since the NPV is negative, or the PV of inflows is less than the PV of outflows for the project, investing in it will decrease shareholder wealth. The investment opportunity should be rejected. Even at the higher discount rate of 6%, the PV of inflows would decrease further, and the decision would be the same i.e. it is better not to invest here. Part II: T-Mobile-Sprint Merger Mergers and acquisitions are usually the two routes chosen by corporate entities to expand their businesses in the marketplace. These are often a hot topic in the business press (McClure, 2011). One rumor being floated around is a potential merger between mobile phone giants T-Mobile and Sprint. Mergers between two large companies are usually complicated, even though there may be possible synergies in 4G technologies that might be possible in such an instance. While mergers can bring about great rewards, at the same time they can also entail great risks and pitfalls. Differences in valuation, differences in accounting procedures and operational and administrative difficulties may emerge (Gaughan, (2001). This part of the assignment asks us to do some research concerning the arguments both for and against such a merger from a financial perspective. We are considering the deal from the point of view of whether or not such a merger would be a profitable undertaking that would add value to the shareholders of both corporations or not. Do you think a merger between Sprint and T-Mobile would add value to the shareholders of both corporations? Based on your analysis and findings (Part I and Part II), what would you recommend to the shareholders of both corporations? Should both companies merge? Please explain your reasoning. From the point of view of synergistic benefits, there is certainly a lot of merit in seeking to merge Sprint and T-Mobile. As of the date of the article in July 2010, both Sprint ...Show more

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Module 5 Case Assignment Name of the Writer Name of the Institution Net Present Value, Mergers, and Acquisitions Part I: Calculating NPV and Capital Budgeting Decision Every company has a mix of assets and liabilities that make up its balance sheet. Companies are also faced with financial and investment decisions from time to time as they seek to survive and grow in the marketplace…
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