QUESTION 4 Present value of incremental cash flows 600000÷0.08 $7500000 (b) PVT(A)= Gain+PV $7500000+$20000000 $27500000 (c) Cash Alternative Net cost Cash Paid-PVT 20000000 $5000000 Share alternative et cost x PVA+T-PVT Where x=25% PVa+T E PVA+PVT+ Gain $35000000+$20000000+$7500000 62500000 Net cost 025×$6250000)-S20000000 $15625000-$20000000 $4375000 NPⅤ Gain-Net cost NPVCASH $7500000-($5000000 $12500000 NPVSHARES=$7500000-(-$4375000 ll875000 (e) Choose the Cash alternative which has the higher NPVAugust 2003 QUESTION 4 (a) Gain = Present value of incremental cash flows = $600 000 ÷ 0.08 = $7 500 000 (b) PVT(A) = Gain + PVT = $7 500 000 + $20 000 000 = $27 500 000 (c) Cash Alternative Net cost = Cash Paid - PVT = $15 000 000 - $20 000 000 = -$5 000 000 Share Alternative Net cost = x.PVA+T - PVT Where x = 25% PVT = $20m PVA+T = PVA + PVT + Gain = $35 000 000 + $20 000 000 + $7 500 000 = $62 500 000  Net cost = (0.25 ×$62 500 000) - $20 000 000 = $15 625 000 - $20 000 000 = -$4 375 000 (d) NPV = Gain - Net cost NPVCASH = $7 500 000 - (-$5 000 000) = $12 500 000 NPVSHARES = $7 500 000 - (-$4 375 000) = $11 875 000 (e) Choose the CASH alternative which has the higher NPV