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EconomicsQ&A LibraryPart 1 and Part II are independent. Please answer both parts.Part I: You are advising company ABC on its merger and acquisition case. The buyer company offers ABC two options.- Option #1= $100 million cash at the acquisition date.- Option #2 = $25 million cash at the acquisition date and another additional $90 million AFTER one year.The management team of ABC perceives a 30 percent annual discount rate. Which option should ABC choose? Show your work. Part II: What is the definition of internal rate of return (IRR) (it is efficient to write down the formula)? What are the given information and what is the unknown variable?Question

Asked Aug 1, 2019

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Part 1 and Part II are independent. Please answer both parts.

Part I: You are advising company ABC on its merger and acquisition case. The buyer company offers ABC two options.

- Option #1= $100 million cash at the acquisition date.

- Option #2 = $25 million cash at the acquisition date and another additional $90 million AFTER one year.

The management team of ABC perceives a 30 percent annual discount rate. Which option should ABC choose? Show your work.

Part II: What is the definition of internal rate of return (IRR) (it is efficient to write down the formula)? What are the given information and what is the unknown variable?

Step 1

To answer this question we need to evaluate present value of payments in both the cases.

The present value of payment in case of option 1 is $100 million as payment is made on acquisition date (t= 0).

But in case of option 2, company ABC has to determine the present value of $90 million that they will receive next year (t=1) assuming a discount rate of 30% in addition to an amount of $25 million at the acquisition date (t=0).

That ...

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