Task: Google is considering a new project that will cost $1,750,000 (initial cash outflow).
Year Cash Flow
0 -$1,750,000
1 350,000
2 630,000
3 700,000
4 550,000
5 850,000
Google's cost of capital (discount rate) is 14%, and their net present value is $281,369.67.
Google is considering acquiring Groupon. Based on the above information, what would be the recommendation to the executives and the shareholders of Google? Would such an acquisition be a profitable undertaking that would add value to the shareholders of two corporations (Google and Groupon)? Should the project be accepted? The shareholders of Google would also like to know the meaning of NPV concept.
The report for the shareholders of Google and Groupon should include answers to the following questions:
1) Does Google's potential acquisition of Groupon add value to the shareholders of both corporations? Why or why not?
2) Based on the above information, what is a good recommendation to the shareholders of Google and Groupon? Please explain the reasoning behind the explanation.
Also, please include responses to the following issues:
a) The impact on Google shareholders
b) The impact on Groupon shareholders
c) The financial conditions of both corporations
d) Why might one combined Google/Groupon company be more profitable than if they remained separate companies? In general, what makes an acquisition successful?
e) Potential pitfalls - might the combined entity actually be less profitable than either company operating independently? What are the risk factors with this potential acquisition?