Management and the Technology Professional – B302
Case study answer 3
Notes and Calculations
P(Success of Project) = 0.8
P(MS Takeover) = 0.4
K=0.04
1.
If Microsoft takeover and the project is a success then the NPV is:
- Present Value = (cost)/(1+K)^N
- Present Value 1 = (-25,000)/(1+0.04)^1
- Present Value 2 = (90,000-20,000)/(1+0.04)^2
NPV1 for this is outcome £40,680.47
2. If Microsoft and Yahoo do not merge then:
- Present Value 1 = (-25,000)/(1+0.04)^1
- Present Value 2 = 90,000/(1+0.04)^2
NPV2 for this is £59,171.60
Answer
As the software engineer for this project, firstly I would have to look into the probabilities of a takeover with Microsoft and the chances of this project becoming a success or failure. If Microsoft do takeover then there is an additional cost to the project of £20,000.
If we borrow £25,000 to start this project from a high street bank we could acquire an interest rate of around 4%. An equivalent loan with Abbey over a year would be a typical 7.9% APR. In the short period of four months we should complete the project and earn the money back. The Abbey’s bank manager quoted us an interest of 3.5%. Barclays on the other hand are offering 12% APR and would give us 4% for the same amount of time.
Based on the network tree (See Link -
Image of Decision Tree) and the net profit value I believe we should take on the project. The npv on a successful project is greater than £40,000 with the maximum amount of around £59,000 for four months work.
If we turn the project down there is a considerable revenue loss of up to £90,000. This amount would be a shame to lose as most of our advertising campaigns end with good results. One of the problems faced with the choice is if the company merges with Microsoft. In this scenario we would have to budget another £20,000 for advertising contracts but looking at the net gain there is little to deter us away from such project.
Yahoo are under takeover bids from 3 companies. These include Microsoft, Google and a media company (Time Warner, News Corp or Viacom -
one of 3 other companies wanting yahoo). The company has had offers from Microsoft in the past (See Link -
Offer for yahoo May 07) and turned them down, however it is more and more likely that this will happen in the near future. It may or may not be Microsoft but there will be a merger. With the extra money Microsoft is willing to pay, it looks good for yahoo share holders (who want the merge to go ahead) and for the CEO is closer to a 50 / 50 decision.
Looking back at the decision tree, based on previous project our advertising campaigns have an 80% chance of success. Microsoft has a 40% chance of merging with Yahoo. This has increased from the 25% change this time last year.
Since the control of the company is out of my hands, I believe that that the profits with or without a takeover make the decision easy to make.
