NPV
Obviously the easiest and most error-free way of doing this is in Excel. Thus, we get the following table for the NPV calculation.
Flow
NPV (1-5)
$2,031,369.67
Total NPV
$281,369.67
Google should accept the project, because it has a positive net present value. All projects with a positive net present value add to shareholder wealth. Unless there is a comparison between two mutually exclusive projects, any project with a positive NPV should be accepted. In Google's case, given how much cash it has, it is hard to imagine that this project would be mutually exclusive to another.
How Acquisitions Work
The argument for an acquisition is that the purchasing company feels that the combined value of the two firms is greater than the sum of the parts. The first assumption is that markets are efficient, such that the stock price of Groupon reflects the expected present value of its future cash flows. Thus, if Google buys Groupon at the current market value, it will receive fair value for the transaction. The second assumption is that there needs to be a premium to entice Groupon shareholders to sell their company to Google. Indeed, if the shareholders know that Google wants to buy a controlling interest in the company, as profit-seekers they will make their shares scarce until the price comes up. Thus, Google must pay more than fair market value for the Groupon shares.
This leads to the conclusion that Google needs to believe that the combined value of the two companies is going to be greater than the sum of the two parts. The sum of the two parts reflects the current market price of these. Google is already going to pay more than that. Plus, Google needs to earn a return greater than its hurdle rate on the acquisition. As such, for this deal to add value to Google's shareholders, it must believe that it can add substantially more value to Groupon, or that Groupon will add substantially more value to Google, in order to justify the acquisition. This is why acquisitions are risky, because this added value is based entirely on assumptions about what the two companies or combined...
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