The subject of this paper is a modified net present value, and how it could be a useful tool for synergy valuation in the process of business combination. Every successful acquisition has to result in synergy in the post acquisition value. In the process of valuation each company has three components that must be taken into account for an efficient valuation (assets, earning power and firm uniqueness). The process of analyzing business combination could be divided in three interdependent analyses: (1) An analyst must start by applying traditional capital budgeting analyses; (2) followed by identifying various flexibility options; and finally, (3) an analyst must determinate the present value of other strategic options along with the overall certainty of exercising them, together with the added certainty value of these options on traditional present value of business combination. Traditional capital budgeting analyses of business combination is based on net present value techniques. These techniques result with inadequate present value if the post-acquisition reinvestment rate is different from the post-acquisition cost of capital. In these cases, the analyst can apply modified net present value method.
valuation business combination net present value modified net present value decision tree option value