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?

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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?

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Expert Answer

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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