A software company paid $19,000,000 to acquire a Language Translation software w

Question

A software company paid $19,000,000 to acquire a Language Translation software with projected annual sales revenue of $7,558,272. The software will become obsolete after three years and the short term interest rate is eight percent. Calculate the present value of the sales revenue at the end of the first year b. Calculate the present value of the sales revenue at the end of the second year. c. Calculate the present value of the sales revenue at the end of the third year. d. Calculate the present value of the projected stream of revenue for the next three years. e. Compare the present value of the revenue stream with the purchase price and explain if the acquisition was the right decision. Provide a Yes or No answer QUESTION 2 A software company paid S19,000,000 to acquire a Language Translation software with projected annual sales revenue of $7,558,272. The software will become obsolete after three years and the short term interest rate is eight percent.Calculate the present value of the sales revenue at the end of the second year c. Calculate the present value of the sales revenue at the end of the third year d. Calculate the present value of the projected stream of revenue for the next three years. e. Compare the present value of the revenue stream with the purchase price and explain if the acquisition was the right decision. Provide a Yes or No answer

Explanation / Answer

ans:

P.V. = C/(1+r)^t where , C= amount , r = int rate , t = time period

P.V. of sales revenue at end of 1 year = 7558272/ (1+0.08)^1 = $6,998,400

P.V. of sales revenue at end of 2 year = 7558272/ (1+0.08)^2 = $6,480,000

P.V. of sales revenue at end of 3 year = 7558272/ (1+0.08)^3 = $6,000,000

P.V of stream of revenue for 3 years =  P.V. of sales revenue at end of 1 year + P.V. of sales revenue at end of 2 year +P.V. of sales revenue at end of 3 year

= $6,998,400 + $6,480,000 + $6,000,000 = $ 19,478,400

yes, the decision was right as present value of revenue is more than the cost of software.

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