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CS Professional · Strategic Management and Corporate Finance · Managing the Multi-Business Firm and Analyzing Strategic Edge

Two firms plan a merger. Firm A and Firm B each have yearly costs of Rs 50 crore for separate back-office functions. After the merger a combined function would cost Rs 85 crore a year. One-time integration cost is Rs 30 crore. Ignoring discounting and taxes, in how many full years does the cost synergy recover the integration cost?

The annual saving is Rs 15 crore (Rs 100 crore less Rs 85 crore), so the Rs 30 crore integration cost is recovered in 2 years, ignoring discounting and tax.

  1. A2 years
  2. B3 yearsCorrect
  3. C1 year
  4. D6 years

Explanation

Combined separate cost = 50 + 50 = Rs 100 crore. After merger = Rs 85 crore, so annual saving = Rs 15 crore. Payback = 30 / 15 = 2 years exactly. Hence the answer is 2 years, not 3.

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