Management and the Technology Professional – B302

Case study answer 3

After conducting the decision tree analysis and calculating the NPV techniques, being the Yahoo software engineer, I believe that the decision I would make is to start the project. The following lines will explain why I have proceeded with such a decision.

First of all, Yahoo’s project called ‘Panama’ has failed to live up to expectations and this fiasco has led to Yahoo’ share price failing to a four-year low. As a result of that, 1000 jobs were cancelled and the chief executive resigned from his position.

Secondly, Microsoft has proposed a very generous offer to Yahoo. This offer has gone beyond Yahoo ambitions as it is worth 45 billion dollars which is one and a half times more than Yahoo’s share price (31 billion) in the market. In addition, the deal has promised to offer retention packages to a various number of Yahoo’s employees.

Thirdly, on the ethical basis, I find this project as an opportunity to provide the daily bread for those who lost their jobs because of the failure of the ‘Panama’ project and save their lives as well as their families especially those who entirely rely on this job as their living source.

Next, this project can be seen as a chance for both Microsoft and Yahoo to team up to start competing against Google in the industry of searching and advertising. This will create a rival for Google in the global market and reduces the monopolization led by Google to better promote the advertising industry and come up with new standards.

Regarding the professional perspective of the project, I have assigned a probability of 80% for the acquisition to take place. This is because Yahoo is the second famous leading company in the advertising industry after Google and everybody would like to acquire Yahoo for this reason. Also, taking into account that Microsoft is a pioneer in the software field and their generous offer I doubt that managers at Yahoo will turn a blind eye onto such a great deal. I have found the NPV for this path to be 43,253 pounds after excluding potential charges which indicates I will earn a net profit of 43,253 pounds.

To sum up, I would like to stress out my decision again on going ahead with the project as I see the emerging of both companies as a precious chance as well as taking into account the professional aspect of the decision and the profit to be made.

K value:

The value of my interest rate was based on the interest rate of 5.5% from the Bank of England as of January 10 2008, and I rounded the figure to 6% to make calculations a bit neater.
Link: http://news.sky.com/skynews/article/0,,30400-1300143,00.html

* K = 6% per annum, therefore for 4 months, K = 6x (4/12) = 2/100 = 0.02
* As there are two payments being made one at the start of the project and the other at the end of the project, N = 2 in this case

For the first path, Microsoft acquires Yahoo and the project succeeds,
Present Value a = 90,000 / (1+ 0.02) ^2 = $86,505
Present Value b =20,000 / (1+ 0.02) ^2 = $19,223
Present Value c =25,000 / (1+ 0.02) ^2 = $24,000

Thus, NPV for the first path = PV a + PV b + PV c = $86,505 - $19,223 - $24,029 = $43,253

For the second path, Yahoo stays independent and the project succeeds
Present Value d =90,000 / (1+ 0.02) ^2 = $86,505
Present Value e =25,000 / (1+ 0.02) ^2 = $24,029
Thus, NPV for the second path = PV d + PV e = $86,505 - $24,029 = $62,476.

For the third path, Project fails:
Present Value f = NPV = 25,000 / ( 1+ 0.02 )^2 = $24,029.

Reference:
[1] http://www.economist.com/business/displaystory.cfm?story_id=10632491

[2] http://www.economist.com/business/displaystory.cfm?story_id=10636325

[3] http://finance.yahoo.com/q?s=YHOO