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IntelAir Present Value
You are an investment bank intern and your first job is to help with an acquisition project. Your client, Purifier, is an industry leader in the air conditioning business. Recently, Purifier approached your investment bank and expressed its interests in acquiring a start-up called IntelAir. Your project manager assigned you the task of evaluating this acquisition. After one week of research, you gathered the following information about IntelAir.
IntelAir was founded two years ago by a few college dropouts. IntelAir has developed a proprietary temperature sensor antenna and a patented air purifying system. Purifier thinks that acquiring IntelAir will bring valuable economic synergies and expand Purifier’s market share.
IntelAir has signed contracts with several temperature sensor companies to deliver its antenna. The contract specifies that over the next ten years (years 1 to 10), IntelAir would deliver their most up-to-date sensor antennas for $1000/unit. The yearly order volume is 5000 units for a total revenue of $5,000,000. After 10 years, IntelAir anticipates that there will be no more demand for antenna due to landscape changes in the technology space.
The all-inclusive cost of sensor production is $700/unit. However, IntelAir expects that in year 5, there will be a major technology upgrade. IntelAir will incur a one-time upgrading expense in year five, which is not included in the previous all-inclusive cost. The upgrading expense is $800,000.
Also, Purifier intends to sell the air purifying system patent one year after the acquisition (year 1). The patent’s expected selling price is $2,000,000.
Purifier currently uses a discount rate of 10%.
What is the maximum Purifier should pay for IntelAir? (please use two decimal digits in your answer)

Sagot :

anthougo

Answer:

IntelAir Present Value

The maximum amount that Purifier should pay for IntelAir is:

=  $10,538,700.00.

Explanation:

a) Data and Calculations:

Value of InterlAir:

Annual Sales Revenue = $5,000,000 ($1,000 * 5,000 units)

Annual all-inclusive cost = 3,500,000 ($700 * 5,000 units)

Net annual cash inflow = $1,500,000 ($300 * 5,000 units)

Year 1, Cash inflow from the sale of patent of the air purifying system = $2,000,000

Year 5 Technology upgrading expense = $800,000

Discount rate = 10%

Duration = 10 years

Annuity Factor for 10 years at 10% = 6.145

PV factor at Year 1 at 10% = 0.909

PV factor at Year 5 at 10% = 0.621

Present value of Cash inflows:

Net annual cash inflow $1,500,000 for 10 years at 6.145 =    $9,217,500

Year 1 Sale of patent for $2,000,000 at 0.909 =                       1,818,000

Year 5 Technology upgrade for $800,000 at 0.621 =               (496,800)

Present value of IntelAir =                                                      $10,538,700              

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