Corp Dev case study - Calculating returns
For a corp dev case study, how does one calculate return on investment (IRR, NPV, Cash on Cash, etc.) if the acquired business is integrated into the parent as opposed to acquired then exited 5 years later like in a typical PE case study. Would you just calculate the present value of revenue growth and cost savings?
Couldn't you just calculate the NPV of the business without the acquisition and then calculate the NPV with the acquisition minus the cost of the acquisition and look at the difference?
The net cash flows per year as a result of the acquisition should be used, including any impacts of exiting or integrating the business. Model the investment costs, new revenue, and new costs to get your NPV.
This.
It's no different than a project finance case study. You are looking to see if the investment should be made, whether its another business/company or new PP&E.
So if the business is integrated instead of exited after a few years, would you just calculate a terminal value at the end of the projections like a normal DCF analysis? How many years is standard to assume reaching a normalized level of growth for Gordon Growth method?
Yes. The terminal value does not have to be tied to an exit. It is the value of the business beyond what you can reasonably forecast (I'd cap it at 5 years, though I've seen plenty corp fin people stretch to 10 years).
You could also use an accretion/dilution analysis.
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