capital budgeting case 9

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Your company is thinking about acquiring another corporation. You have two choicesthe cost of each choice is $250,000. You cannot spend more than that, so acquiring both corporations is not an option. The following are your critical data:

 

Corporation A

 

Revenues = $100,000 in year one, increasing by 10% each year

Expenses = $20,000 in year one, increasing by 15% each year

Depreciation expense = $5,000 each year

Tax rate = 25%

Discount rate = 10%

 

Corporation B

 

Revenues = $150,000 in year one, increasing by 8% each year

Expenses = $60,000 in year one, increasing by 10% each year

Depreciation expense = $10,000 each year

Tax rate = 25%

Discount rate = 11%

 

Compute and analyze items (a) through (d) using a Microsoft® Excel® spreadsheet. Make sure all calculations can be seen in the background of the applicable spreadsheet cells. In other words, leave an audit trail so others can see how you arrived at your calculations and analysis. Items (a) through (d) should be submitted in Microsoft® Excel®; indicate your recommendation (e) in the Microsoft® Excel® spreadsheet;  the paper stated in item (f) should be submitted consistent with APA guidelines.

 

a.     A 5-year projected income statement

b.    A 5-year projected cash flow

c.     Net present value (NPV)

d.    Internal rate of return (IRR)

e.     Based on items (a) through (d), which company would you recommend acquiring?

 

f.     Write a paper of no more 1,050 words that defines, analyzes, and interprets the answers to items (c) and (d). Present the rationale behind each item and why it supports your decision stated in item (e). Also, attempt to describe the relationship between NPV and IRR. (Hint. The key factor is the discount rate used.)  In addition to the paper, a Micosoft® Excel® spreadsheet showing your projections and calculations must be shown and attached.

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