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Assignment 2: Question 1

Purchase Decision

Cost of the Bus

Year 0: $ 50 000 000

Balance Year 1: $ 60 000 000

Salvage Value: Year 5: $ 10 000 000

Fuel Costs

Year 1: 10 000 000 (1+ 0.1) 1 = 11 000 000

Year 2: 10 000 000 (1+ 0.1)2 = 12 100 000

Year 3: 10 000 000 (1 + 0.1)3 = 13 310 000

Year 4: 10 000 000 (1+0.1)3× (1.05)1 = 13 975 500

Year 5: 10 000 000 (1+0.1)3× (1.05)2 = 14 674 275

Repairs

Year 1: 5 000 000 (1+0.1)1 = 5 500 000

Year 2: 5 000 000 (1+0.1)2 = 6 050 000

Year 3: 5 000 000 (1+0.1)3 = 6 655 000

Year 4: 5 000 000(1+0.1)3× (1.05)1 = 6 987 750

Year 5: 5 000 000 (1+0.1)3× (1.05)2 = 7 337 138

Other costs

Year 1: 2 000 000 (1+0.1)1 = $ 2 200 000

Year 2: 2 000 000 (1+0.1)2 = $ 2 420 000

Year 3: 2 000 000 (1+0.1)3 = $ 2 662 000

Year 4: 2 000 000 (1+0.1)3× (1.05)1 = $ 2 795 100


Year 5: 2 000 000 (1+0.1)3× (1.05)2 = $ 2 934 855

Hiring Decision

Current Costs = 800 000 ×40

= $ 32 000 000

Year 1: 32 000 000 (1+ 0.20)1 = $ 38 400 000

Year 2: 32 000 000 (1+0.20)2 = $ 46 080 000

Year 3: 32 000 000 (1+0.20)2× (1.1)1 = $ 50 688 000

Year 4: 32 000 000 (1+0.20)2× (1.1)2 = $ 55 756 800

Year 5: 32 000 000 (1+0.20)2× (1.1)3 = $ 61 332 480

Year/ Year 0 Year 1 Year 2 Year 3 Year 4 Year 5


Narration
Cost of 50000000 60 000 000
the bus
Salvage (1000000)
Value
Fuel 11 000 000 12 100 000 13 310 000 1397500 14 674 275
Expenses
Repairs 5 500 000 6 050 000 6 655 000 6 987 750 7 337 138
Other 2 200 000 2 420 000 2 662 000 2 795 100 2 934 855
Costs
Total 50 78 700 000 20 570 000 22 627 000 23758350 14 946 268
Purchase 000000
Costs

Hiring 38400 000 46 080 000 50 688 000 55756800 61 332 480
Costs
Annual (5000000 (40300000) 25510000 28061000 31998450 46 386 212
Savings 0)
b. Payback Period

Year Cashflow Cumulative Cashflow


0 (50 000 000) (50 000 000)
1 (40 300 000) (90 300 000)
2 25 510 000 (64 790 000)
3 28 061 000 (36 729 000)
4 31 998 450 (4 730 550)
5 46 386 212 41 655 662

4 730 550
Payback period = 4 years +
46 386 212

= 4.10 years.

c. Net Present Value

Year Cashflow Discounting Factor Present Value


0 (50 000 000) 1.0000 (50 000 000)
1 (40 300 000) 0.9091 (36 636 364)
2 25 510 000 0.8264 21 082 645
3 28 061 000 0.7513 21 082 645
4 31 998 450 0.6830 21 855 372
5 46 386 212 0.6209 28 802 188
Net Present Value 6 186 486

The Net Present Value is $ 6 186 486

d. Internal Rate of Return

Net Present Value @ 15%

NPV = - $ 5 946 327

Net Present Value @ 12%

NPV = 983 914


¿
IRR = r ++ NPV + NPV −NPV −¿ ׿ ¿ ¿

983 914
= 0.12+ ×(0.15−0.12)
983 914+5 946 327

= 0.12 +0.004259219

= 0.1243

= 12.43%

The Internal Rate of Return = 12.43%

e) The University should consider purchasing the bus because the annual savings that arise
from such have a positive net present value and also have an internal rate of return that
exceeds the cost of capital. In the same vein, the annual savings have a payback period that is
less than the duration of the project. Given these scenarios, it would be worthwhile for the
University to purchase the bus than hire it.
Question 2a.

According to Investopedia, an amalgamation is a combination of two or more companies into


a brand-new entity by combining the assets and liabilities of both entities into one. Van
Horne (2008) argues that this differs from a traditional merger in the sense that neither of the
two companies involved survives as an entity.

A traditional merger is a process of combining two or more companies to form either a new
company or an existing company that absorbs the other target companies. It is in essence, the
process of combining multiple businesses into a single business entity (Pike, 2006). On the
other hand, an amalgamation is a merger process in which two or more entities combine to
form a completely new entity or company. An amalgamation is a suitable arrangement in
which two or more companies operate in the same industry, and as a result, aids in cost
reduction through operational synergy (Gitman, 2013).

Because companies specifically are reluctant to cooperate with their rival competitors, an
outsider is usually required to put together a merger. In contrast, the surviving entity is
typically the one to take the lead in a traditional merger and does not often require an outside
promoter. When two companies merge, the surviving company absorbs the merged
company’s culture and identity.

Amalgamation, also known as consolidation is a process of combining two or more


businesses into a single entity that uses elements of each company’s identity to create
something new. When two companies merge, the assets and liabilities of the target company
are combined with the assets and liabilities of the surviving company. The shareholders of
both companies are combined with the shareholders of the new company. In a merger, the
shareholders of the absorbing entity retain their ownership, whereas the shareholders of the
absorbed entity gain ownership of the absorbing company. In an amalgamation, all the
shareholders in the existing entities become shareholders in the new entity (Muponda, 2007).

In a merger, the size of the absorbing company is relatively larger than the absorbed
company, whereas, in amalgamation, the size of the target companies is comparable. A
merger can be vertical, horizontal, or conglomerate whereas an amalgamation usually takes
place between entities in the same industry at the same level of production. The
amalgamation of CBZ Holdings Subsidiaries is a unique case as it involves units that were
owned by the same shareholders and only combined operations for rationalization reasons.

Question 2b.

The amalgamation of the CBZ Bank Limited and CBZ Building Society brings out a host of
benefits and shortcomings to the entities, the investing public, stakeholders, and other players
in the financial services sector. These benefits and disadvantages are discussed below.

Amalgamation takes place when two or more companies with similar types of businesses
serving the same markets combine their business operations to cut costs. The prime reason
for the consolidation of CBZ Bank Limited and its Building Society Peer was to cut down on
operational costs through rationalization of the business model. This meant the reduction in
rental, staff, and other operational costs as the building society operations were combined
with the bank’s operations.

The amalgamation process also results in the achievement of operational and financial
synergy. Operational synergy is when the value and performance of two firms combined is
greater than the sum of the separate firms apart, and as such, allows for the firms to increase
their operating income and attain higher growth. On the other hand, financial synergy occurs
when the joining of the two companies improves financial activities to a level greater than
when the entities were operating as separate companies.

One of the most important advantages of opting for amalgamation is the elimination of
competition in the market. The CBZ Bank has a strong command of the customer base and
the combination of the two entities may likely have a positive bearing on the market share of
the financial services giant. Van Horne and Wachowicz (2008) argue that when two or more
entities amalgamate and combine operations, the competition in the industry automatically
gets eliminated. Amalgamation aids in increasing the combined company's market share.
Market share can be increased by combining the sales of the amalgamated companies as well
as increasing the amalgamated company's market presence.

The process of amalgamation also increases managerial effectiveness over the business
model. Managerial effectiveness refers to management’s ability to achieve the organization’s
goals and balance employee expectations and development. A merged company improves its
managerial effectiveness by changing an ineffective management team for a more effective
and efficient management team. requiring managers to share their previous work experiences
in the best interests of the company on an as-needed basis.

Economies of Scale. The merging of the CBZ units into one amalgamated CBZ Bank
Limited may benefit the new entity through economies of large scale mainly by cost
optimization, access to a larger market, and effective utilization of resources, among other
benefits. Pike (2006) contends that the merged company can gain an operating cost advantage
by lowering production costs. This is made possible by the economies of large-scale
operations.

Amalgamation, however, is also associated with its own drawbacks or shortcomings as


discussed below.

Sometimes healthy competition which is necessary for the efficiency of the industry is
eliminated when entities acquire a significant portion of the market share which may make
the businesses reluctant to innovate and to be efficient. Muponda (2007) maintains that once
mergers are concluded, the benefits of healthy competition such as improved quality of
service provision and lower prices are lost. The monopoly achieved through amalgamation is
not healthy for the market.

The companies taking part in the amalgamation process lose their identities which ultimately
affects the goodwill of the respective companies and the products that they offer.

The amalgamation of two or more entities results in the reduction of the number of
employees. This therefore means that the employees working in the companies pre-
amalgamation become unemployed which is not healthy for the economy especially for the
Zimbabwean environment where the rate of unemployment is already high.
Reference List

1. Ehrhardt M.C and Brigham E.F (2011) Corporate Finance. A Focused Approach.
Fourth Edition. South Western Cengage Learning.
2. Pike R and Neale B (2006) Corporate Finance and Investment. Decisions and
Strategies. Fifth Edition. Prentice Hall.
3. Van Horne J.C and Warchowicz J.M (2008) Fundamentals of Financial Management
13th Edition. Pearson Education Limited.
4. Pandey I.M (2011) Financial Management. Viskas Publishing House Private Limited.

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