The large publishing company you work for has built up an excess pile of $200M cash due to better than expected sales and delays in making any new investments in production facilities. As the newly promoted Chief Financial Officer, the CEO has instructed you to find uses of this unneeded cash that will earn the highest return for shareholders; liquidity (ease of convertibility into cash) is not an issue. You may also invest any amount of cash (from $200M to any remaining after investments) into a stock market index expected to earn 6% per year or distribute to shareholders as a dividend. Please note that your cost of capital to consider for the project(s) you choose is 9%.Write to the CEO in a one page summary explaining why the options (not exceeding $200M in cash required) you have chosen are the best. The options are as follows:
Option 3: There is a small book store chain that would give you a better outlet to sell your books in person while also profiting from the sales of your competitors. You hired an investment bank specializing in acquisitions to help you analyze this possibility and have already paid them $10M for their services. If the acquisition occurs, you will owe the investment bank an additional $5M. Recently the small book store chain gave you their final offer; you can purchase them for $50M in cash. Below are the income effects your firm would realize from acquiring this firm:
Year 1 Year 2 Year 3 Year 4 Year 5
Sales $30M $30M $35M $40M $40M
Costs ($15M) ($15M) ($20M) ($20M) ($20M)
Question: Compute the Payback Period, Net Present Value and Internal Rate of Return. Explain your reasoning. Read the description of each option to determine relevant costs and benefits (those that change based on whether you undertake the project or not). Do not consider costs that are incurred regardless of your decision or costs that occurred in the past (sunk costs).