【正文】 Use the book value of the land, which is $ 5 million c) Use the market value of the land, which is $ 40 million d) Other: Aswath Damodaran 28 Case 2: Incremental Cost? An Online Retailing Venture for Bookscape ? The initial investment needed to start the service, including the installation of additional phone lines and puter equipment, will be $1 million. These investments are expected to have a life of four years, at which point they will have no salvage value. The investments will be depreciated straight line over the fouryear life. ? The revenues in the first year are expected to be $ million, growing 20% in year two, and 10% in the two years following. ? The salaries and other benefits for the employees are estimated to be $150,000 in year one, and grow 10% a year for the following three years. ? The cost of the books will be 60% of the revenues in each of the four years. ? The working capital, which includes the inventory of books needed for the service and the accounts receivable will be10% of the revenues。 of $91,097 yields a present value of $24,785. Aswath Damodaran 42 Case 2: Synergy in a merger.. ? Earlier, we valued Sensient Technologies for an acquisition by Tata Chemicals and estimated a value of $ 1,559 million for the operating assets and $ 1,107 million for the equity in the firm. In estimating this value, though, we treated Sensient Technologies as a standalone firm. ? Assume that Tata Chemicals foresees potential synergies in the bination of the two firms, primarily from using its distribution and marketing facilities in India to market Sensient’s food additive products to India’s rapidly growing processed food industry. ? It will take Tata Chemicals approximately 3 years to adapt Sensient’s products to match the needs of the Indian processed food sector – more spice, less color. ? Tata Chemicals will be able to generate Rs 1,500 million in aftertax operating ine in year 4 from Sensient’s Indian sales, growing at a rate of 4% a year after that in perpetuity from Sensient’s products in India. Aswath Damodaran 43 Estimating the cost of capital to use in valuing synergy.. ? To estimate the cost of equity: ? All of the perceived synergies flow from Sensient’s products. We will use the levered beta of of Sensient in estimating cost of equity. ? The synergies are expected to e from India。 investments in the inventory are made at the beginning of each year. ? The tax rate for Bookscape as a business is 40% and the cost of capital for Bookscape is %. Aswath Damodaran 40 NPV of Caf233。 the investments in working capital have to be made at the beginning of each year. At the end of year 4, the entire working capital is assumed to be salvaged. ? The tax rate on ine is expected to be 40%. Aswath Damodaran 29 Cost of capital for investment ? Wee will reestimate the beta for this online project by looking at publicly traded Inter retailers. The unlevered total beta of inter retailers is , and we assume that this project will be funded with the same mix of debt and equity (D/E = %, Debt/Capital = %) that Bookscape uses in the rest of the business. We will assume that Bookscape’s tax rate (40%) and pretax cost of debt (6%) apply to this project. Levered Beta Online Service = [1 + (1 – ) ()] = Cost of Equity Online Service = % + (6%) = % Cost of CapitalOnline Service= % () + 6% (1 – ) () = % Aswath Damodaran 30 Incremental Cash flows on Investment NPV of investment = $98,775 Aswath Damodaran 31 The side costs… ? It is estimated that the additional business associated with online ordering and the administration of the service itself will add to the workload for the current general manager of the bookstore. As a consequence, the salary of the general manager will be increased from $100,000 to $120,000 next year。 consequently, we will add the country risk premium of % for India. ? We will assume that Sensient will maintain its existing debt to capital ratio of %, its current dollar cost of debt of % and its marginal tax rate of 37%. ? Cost of debt in US $ = % () = % ? Cost of capital in US $ = % () + % ()= % ? Cost of capital in Rs = = ??(1 ? Cos t of Ca p i t a l U S $ ) ( 1 ? I n f l a t i on Ra t e Rs )( 1 ? I nfl a t i on Ra t eU S $ ) 1??(1 . 0 9 6 ) (1 . 03 )(1 . 02 ) 1 = 10 .67%Aswath Damodaran 44 Estimating the value of synergy… and what Tata can pay for Sensient… ? We can now discount the expected cash flows back at the cost of capital to derive the value of synergy: ? Value of synergyYear 3 = ? Value of synergy today = ? Earlier, we estimated the value of equity in Sensient Technologies, with no synergy, to be $1,107 million. Converting the synergy value into dollar terms at the current exchange rate of Rs $, the total value that Tata Chemicals can pay for Sensient’s equity: ? Value of synergy in US $ = Rs 16,580/ = $ 349 million ? Value of Sensient Technologies = $1,107 million + $349 million = $1,456 million ??E xp e c t e d C a s h F l ow Y e a r 4( Cos t o f Ca pi t a l g ) ? 15 00( . 10 67 . 04 ) ? Rs 22 , 47 6 m i l l i on??V a l ue o f S yn e r g y y e a r 3(1 + Cos t of C a pi t a l )3 ?22 , 47 6( 1. 1 06 7 )3 ? Rs 16 , 58 0 m i l l i onAswath Damodaran 45 III. Project Options ? One of the limitations of traditional investment analysis is that it is static and does not do a good job of capturing the options embedded in investment. ? The first of these options is the option to delay taking a project, when a firm has exclusive rights to it, until a later date. ? The second of these options is taking one project may allow us to take advantage of other opportunities (projects) in the future ? The last option that is embedded in projects is the option to abandon a project, if the