Apollo Group Inc is an educational provider which has provided the services in the United States for more than 30 years (Apollo Group, 2012). It should be noted that the company operates such education institutions as the University of Phoenix, the Institute for Professional Development, the College for Financial Planning as well as the Western International University and Insight Schools (Apollo Group, 2012). Furthermore, the company does provide unique educational programs at all levels of learning within the 40 states as well as the District of Colombia (Apollo Group, 2012).
New Acquisition Investment
Buy Finance Capital Budgeting SLP: The Apollo Group Inc essay paper online
Both Apollo Group and a private investment firm The Carlyle Group agreed to a $ 1 billion joint venture: Apollo Global Inc. The newly formed venture is meant to make numerous investment projects in the international educational segment. It is fair noting that Apollo Group committed about 80 % of the total amount while Carlyle Group committed the rest of the amount (Apollo Group, 2012).
Probable Challenges in Securing the Funds for the Initial Investment
First, there is a probable politics challenge. It is emanated from the assumption that the investment is overseen by two distinctive and separate investment committees from the two committed Companies. Politics might take course given the fact the venture at hand demands for a large amount of resources (McCracken, 2005).
Second, there is the probable chance of risks. Given the fact that the venture is new and distinctive, means that there are many forms of risks involved in the course of executing resources and identifying profitable locations upon which to invest the resources. It should be noted that “The Apollo Group” is largely concerned with investing in the U.S domestic markets whereby analysis has already been conducted and determined before investment. However, it is not true with international markets where more risks are evident. Political stability and efficiency of economies are some of the risks which the educational sector might face should the two investment committees agree to participate in the venture (McCracken, 2005).
Third, there is challenge associated with costs of the investment. The new venture is expected to use about $ 1 billion. It is a large amount of money which makes it difficult to commit lest there are losses experienced. Furthermore, the amount can be challenging to secure for the purpose as the stated amount is mostly associated with planned budget and thus premeditated.
Fourth, there might be public relations challenges. It is attributed to the assumption that different countries assume a different methodology of conducting business. The aforementioned difference is largely affected by such facets as culture, economies as well as form of businesses conducted in foreign countries. Thus, the newly premeditated venture is likely to experience hurdles in the course of executing within the distinctive foreign markets altogether (McCracken, 2005).
Estimates of the Initial Investments and the Annual Incremental after-tax Cash Flow
Before resting on an estimate of an investment it is fair that the purported estimate is unbiased, distributed across a wide range of possible results as well as it is stated as a single amount. Thus, the management estimates for the costs of the investment will be $ 1,000,000,000 in ten years. Given the fact that accounting concepts requires that estimates use nominal amounts thus the foretasted amount should be affected by inflation. It means that nominal cash flows are discounted at a flat nominal rate (Accounting Coach, 2012). Let us assume that the expected cash flow is discounted at 5 % discounted rate and a flat yield. The Present Value is calculated as follows:
PV= Future Value (1+i)-n
PV = $ 1,000,000,000(1+0.05)-10
PV = $ 1,000,000,000(1.05)-10
PV = $ 613913253.54
Expected present value is established at $ 613913253.54. It should be noted that the amount possesses both the time value for money but is oblivion of the possible uncertainties. Suppose the tax rate stands at 30 %, the incremental amounts will be calculated as follows:
Timing PV Tax
5 years 783,526,166 235,057,849
6 years 746,215397 235,057,849
7 years 710,681,330 235,057,849
8 years 676,839,326 235,057,849
9 years 644,608,916 235,057,849
10 years 613,913,253 235,057,849
Thus, it can be deduced that the present amount of money which is expected cash flows for the project changes dramatically as year’s progresses. However, the rate of tax is kept constant given the fact that it is a government policy which is amended after long periods of time (FASB, 2001).
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