Corporate Finance

Running Head : Auger Biotech IPO

Times are tough for Auger Biotech . Having raised 75 million in an initial public offering of its stocks early in the year , the company is poised to lunch its product . If Auger engages in a promotional costing 50 million this year , its annual after tax cash flow over the next five years will be only 500 ,000 . If it does not undertake the campaign , it expects its after-tax cash flow to be minus 15 million annually for the same period . Assuming the company has decided to stay in its

chosen business , is this campaign worthwhile when the discount rate is 10 percent ? Why or why not

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To determine whether the promotional campaign is worthwhile to Auger Biotech , the present values annuities should be computed . Net present values should be calculated too . This is as follows :-

Present values of annuities

Present value of annuities factor PVAF 10 , 5 yrs 3 .791 500 ,000 x 3 .791 1 ,895 ,500

Without campaign -15 ,000 ,000 x 3 .791 -59 ,565 ,000

Considering the net present values

With campaign

Present value 1 ,895 ,500

Cost (50 ,000 ,000

Net present value (48 ,104 ,500

Without campaign

Present value -59 ,565 ,000

Cost (50 ,000 ,000

Net present value (109 ,565 ,000

Considering the net present value , the campaign is worthwhile since it has a relatively better net present value

NB : Refer to present value annuity factors used as presented in discounting tables (Kutsad , 2004

REFERENCE

Kutsad , M (2004 .Public Finance (2nd Ed . Macmillan publishers

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