ACCA Strategic Professional · Advanced Financial Management · Acquisitions and mergers versus other growth strategies
Kovex Ltd is considering organic expansion into a new region. It would invest $12 million now, giving net cash flows of $4.0 million per year for 4 years, with no residual value. Kovex's cost of capital is 10%. The 4-year annuity factor at 10% is 3.170. What is the NPV of the organic expansion?
The NPV is positive $0.68 million. Discounting $4.0 million a year for four years at 10% gives a present value of $12.68 million, and subtracting the $12 million initial investment leaves $0.68 million, so the organic expansion adds value.
- A$0.68 millionCorrect
- B$4.00 million
- C$(0.68) million
- D$1.36 million
Explanation
PV of inflows = 4.0 x 3.170 = $12.68m. NPV = 12.68 - 12.00 = $0.68m. Option B ignores discounting of the investment (16 - 12), and C reverses the sign.
Did you get it right without looking?
One question tells you little. A timed set on Acquisitions and mergers versus other growth strategies shows your real accuracy, how long you take and where you lose marks.
More Acquisitions and mergers versus other growth strategies questions
- A manufacturer wants to enter a foreign market where it lacks local knowledge, and the host government requires local ownership participatio…
- Alpha plc (market value $400m) plans to acquire Beta Ltd (stand-alone value $100m). Alpha estimates present value of synergies at $30m. Alph…
- Aldon plc is comparing three growth routes for a new product market: organic growth, a joint venture and a full acquisition. Management want…
- Research on acquisitions generally finds that, on announcement, the shareholders of the target company typically gain while the acquirer's s…
- Evora plc (market cap 300m, 100m shares at 3.00 each) plans to acquire Fynn Ltd, valued standalone at 80m. Synergies have a present value of…
- A European retailer wants to enter a country where foreign ownership of retail businesses is restricted and where it lacks local market know…