Arcadian Microarray Technologies Inc. Harvard Case Solution & Analysis

The point at which Terminal Value calculated:

The annual cash flow forecast should be stopped, when the economic conditions are not feasible to forecast the annual cash flows, because the future economic conditions are estimated to certain limit. The inflation rate and the interest rate of the economy can also be forecasted to certain limit. The other factors whichare restricted to calculate the further cash flows are external factors affecting the market demand of the company and the market value of the economic factors that is raw material, labor, and the other overheads incurring to generate the revenue of the company. When the above mentioned factors restricted to calculate the further cash flows, then the terminal value of the cash flows iscalculated by calculating the infinity of the cash flows. Infinity to cash flows is calculated by dividing the last year cash flow with the weighted average of the company which is less than any future constant growth of the terminal value of the cash flow.

arcadian microarray technologies case solution

arcadian microarray technologies case solution

Varying Present Value with Growth Rate:

The present value of the cash flows varies with the growth rate, that growth rate shows that future growth, which may be due to the interest rate of the economy, inflation of the economy or increase in the purchasing power of the company.Exhibit 6 also shows that at the annual rate is increasing from 2% to 7%, the present value of the Arcadian Microarray Technologies, Inc. is increasing from $23 million to $46 million. The 2% growth rate shows that the future cash flows of the company increases by the equivalent value of 2% of the current year’s value.Similarly, the other growth rate will also apply in the same way as the 2% defines.

The reasonable growth rate for the Arcadian Microarray Technologies, Inc. is chosen by considering the purchasing power of the economy and the inflation of the economy with the interest rate of the economy. The appropriate growth for the Arcadian Microarray Technologies, Inc. is considered as 5% by considering the inflation rate of 2% and other economic aspect of the economy. The present value of the Arcadian Microarray Technologies, Inc. at 5% as mentioned in the exhibit 6 according to the Arcadian management is $52 million and the according to the Sierra management the present value is $35 million.

Alternate Estimates:

The other alternative technique to calculate the terminal value of the Arcadian Microarray Technologies, Inc. are price earnings ratio and the book value method. The price earnings ratio terminal value is calculated by multiplying the price earnings ratio of the Arcadian Microarray Technologies, Inc. with the last cash flow of the projected period. The price earnings ratio is ranged from 15 times to 20 times for the Arcadian Microarray Technologies, Inc. Theterminal value if the price earnings ratio is assumed to be 15 times, then the terminal value is $3,039 million and the present value of the enterprise is $409 and the 60 percent of the enterprise value is $245 million. Furthermore, if the price earnings ratio of the Arcadian Microarray Technologies, Inc.  isin the upper stream that is 20 times than the terminal value of the cash flows is $4,052 and the enterprise value of the company is $545 million.

The second alternative is the book value to price earnings ratio.The book value of the Arcadian Microarray Technologies, Inc. is calculated by calculating the infinity of the last free cash flow of the projected period that is $671.50 in the year 2014. The present value of the book value is $108.45 million....................................

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