# Mergers and Acquisitions

Submitted By toneloc748
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Part I Shareholders of Google we are looking at starting a new project. The project’s cost is \$2,425,000. Our analysts predict that the company will increase cash flows by nearly \$4.2 million over the next 5 years. In table 1 you will see the predicted cash flows for each of the next 5 years. Now we will find out the present value of those cash flows by using a discount rate of 11% which is Google’s Cost of Capital. The equation for the present value of cash flows is calculated using this equation:
PV of CF = CF1 / (1+r)1 + CF2 / (1+r)2 + CF3 / (1+r)3 + CF4 / (1+r)4 + CF5 / (1+r)5
Now to get a good understanding of this equation we have to take the total Present Value (PV) of Cash Flows which is going to be \$2,896,053.10 and subtract the cash outflow (the cost of the new project), this difference is the Net Present Value, or NPV. In table 1 you will see that the net present value of this project is \$471,053.10. “In the case when all future cash flows are incoming and the only outflow of cash is the purchase price, the NPV is simply the PV of future cash flows minus the purchase price (which is its own PV). NPV is a central tool in discounted cash flow (DCF) analysis, and is a standard method for using the time value of money to appraise long-term projects. Used for capital budgeting, and widely throughout economics, finance, and accounting, it measures the excess or shortfall of cash flows, in present value terms, once financing charges are met.” (Princeton n.d.) Basically the NPV is a way of telling us that we will make money on the project, and judging by the NPV of \$471,053.10 we can assess that the new project will pay for itself and start making positive cash flows within 5 years. With these figures I would recommend that Google go ahead with the new project and expect, with predicted cash flows, that the project will make money for Google....

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