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Homework answers / question archive / XYZ Company is exploring two mutually exclusive opportunity

XYZ Company is exploring two mutually exclusive opportunity

Finance

XYZ Company is exploring two mutually exclusive opportunity. There are two available opportunities for XYZ with the following information: a ABC Company has projected annual returns of Php7 Billion and outstanding liabilities of Php5 Billion b. DEF Company has projected annual returns of Php 12 Billion and outstanding liabilities of Php20 Billion c Both companies has terminal value of Php 100 Billion If you will assess the company for five years with the required rate of return of 10%, which company will you recommend purchasing and how much? Why?

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ANSWER

COMPANY DEF IS PREFERRED WITH NPV OF 87.58 BILLION

  ABC COMPANY    
CASH FLOWS   PV FACTOR @10% PV OF CASH FLOWS
YEAR 0 -5   -5
YEAR 1 7.0 0.909 6.36
YEAR 2 7.0 0.826 5.79
YEAR 3 7.0 0.751 5.26
YEAR 4 7.0 0.683 4.78
YEAR 5 107.0 0.621 66.44
ROR 10% NPV = 83.63
  DEF COMPANY    
CASH FLOWS   PV FACTOR @10% PV OF CASH FLOWS
YEAR 0 -20   -20
YEAR 1 12.0 0.909 10.91
YEAR 2 12.0 0.826 9.92
YEAR 3 12.0 0.751 9.02
YEAR 4 12.0 0.683 8.20
YEAR 5 112.0 0.621 69.54
ROR 10% NPV = 87.58

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