STRATEGIC CORPORATE FINANCE

Net Present Value, Mergers, and Acquisitions

Net Present Value, Mergers, and Acquisitions

Introduction

The objective of this paper is to apply the theories of net present value and mergers and acquisitions on cases of real times companies. The paper presents a step by step calculation and analysis of the Net present value of the proposed project. The synergic effect and the possible impact of merger and acquisitions have been explained with the real time example of t-mobile and sprint telecom. The paper commences with an overview of the concept of NPV and mergers and acquisitions. The financial health of t-mobile and sprint have been elaborated along the negative and positive impacts of the merger. In the end, recommendations are presented to the shareholders as to whether the merger will be profitable.

Discussion

Sprint Corporation is a Kansas based American Telecommunication Company. Sprint has a customer base of around 53.4 million customers, making it the third largest wireless telecommunications network in USA, after Verizon Wireless and AT&T Mobility. The company also provides wireless internet services and is a global internet carrier. It is a major owner of Clearwire, which is the largest operator of wireless broadband network.

T-Mobile International is a German-based holding company for the mobile communication subsidiaries of Deutsche Telekom. It is the world's 12th largest cellular phone service provider with more than 150 million subscribers round the globe. Moreover, T-mobile has its distribution in various European countries as well in USA (Marseken, 2010).

Net Present value is the most widely used method by the academicians, investors and financial managers to determine the feasibility of a project in monetary terms (Rohrich, 2007). This method works on the basis of the concept of time value of money. It means that one dollar after one year is worth less than the same amount of money today. The reason is that the increasing inflation increases the cost of capital; as a result, the purchasing power of the same amount reduces as on today (Wernerfelt, 1984). In case of the t-mobile, the Net present value is calculated to be USD 2,160,243.

Year Cash Flow

PV of Cash Inflow

0

$ (4,000,000)

1

$ 350,000

$ 330,189

2

$ 1,700,000

$ 1,512,994

3

$ 2,000,000

$ 1,679,239

4

$ 500,000

$ 396,047

5

$ 3,000,000

$ 2,241,775

 

 

$ 6,160,243

Cost of Capital

6%

 

NPV $ 2,160,243

 

The results of NPV are interpreted on the basis of the positive or negative value. Absolute profitability is achieved if the ...