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CS Professional · Corporate Restructuring, Valuation and Insolvency · Valuation of Business and Assets for Corporate Restructuring

Meridian Foods Ltd's acquired customer relationships are valued by the multi-period excess earnings method. Projected after-tax cash flow attributable to the customers is Rs 50 lakh per year for 3 years. Contributory asset charges (for working capital, fixed assets and workforce) total Rs 15 lakh per year. Discount rate is 10%, cash flows arise at year end. What is the approximate value of the customer relationships?

The customer relationships are worth about Rs 87.04 lakh. Deduct contributory asset charges of Rs 15 lakh from the Rs 50 lakh cash flow to get excess earnings of Rs 35 lakh, then multiply by the 3-year, 10% annuity factor of 2.4869.

  1. ARs 87.04 lakhCorrect
  2. BRs 124.34 lakh
  3. CRs 37.33 lakh
  4. DRs 104.21 lakh

Explanation

Excess earnings = 50 - 15 = 35 lakh per year. Annuity factor for 3 years at 10% = 2.4869. Value = 35 x 2.4869 = 87.04 lakh. Rs 124.34 lakh ignores the contributory asset charges (50 x 2.4869). Rs 37.33 lakh uses only the charges (15 x 2.4869).

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