This is an application of capital budgeting that integrates the projection of a basic cash flow and the computation and analysis of six capital budgeting tools.

Your company is thinking about acquiring another corporation. You have two choices; the 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:

a. Corporation A:
1) Revenues = 100K in year one, increasing by 10% each year. 2) Expenses = 20K in year one, increasing by 15% each year. 3) Depreciation Expense = 5K each year.
4) Tax Rate = 25%
5) Discount Rate = 10%

b. Corporation B:
1) Revenues = 150K in year one, increasing by 8% each year. 2) Expenses = 60K in year one, increasing by 10% each year. 3) Depreciation Expense = 10K each year.
4) Tax Rate = 25%
5) Discount Rate = 11%

You must compute and analyze items (a) through (h) using a Microsoft Excel spreadsheet. Make sure that all calculations can be seen in the background of the applicable spreadsheet cells. In other words, leave an audit trail so that others can see how you arrived at your calculations and analysis. Items (i), (j), and (k) should be submitted in Microsoft Word. c. A 5-year projected income statement

d. A 5-year projected cash flow
e. Net Present Value
f. Internal Rate of Return
g. Payback Period
h. Profitability Index
i. Discounted Payback Period
j. Modified Internal Rate of Return
k. Based on items (a) through (h), which company would you recommend acquiring? l. In a 1,050-1,500-word memo, define, analyze, and interpret the answers to items (c) through (h). Present the rationale behind each item and why it supports your decision stated in item (i). Also, attempt to describe the relationship between NPV and IRR. (Hint: The key...

...CapitalBudgeting Process
HSM 340 – Health Services Finances
November 28, 2012
Organizations that decide to issue bonds generally go through a series of steps. Discuss the six steps.
The six steps are: the borrower who is the health care evaluates the capacity of its debts, brings to date its capital plan, and tries to get its house in together, the borrower who is the health care...

...Week 4 Discussion Question 1b
Introduction
Capitalbudgeting is one of the most crucial decisions the financial manager of any firm is faced with...Over the years the need for relevant information has inspired several studies that can assist firms to make better decisions. These models are assigned so that they make the best allocation of resources. Early research shows that methods such as payback model was more widely used which is basically just determining...

...Strident Marks can utilize the capitalbudgeting to evaluate their proposed long-term investments. Once we have identified a list of potential investment projects, the next step in the process will be to estimate the expected cash flows and risk of each project. Based on these estimates, we can evaluate each project and decide which set of projects are the best for Strident Marks to undertake. The primary decision methods used to evaluate the projects will be...

... 09/05/2014
A - Capitalbudgeting is an analysis of potential additions to fixed assets, it is part of the long term decisions taken by the top management and involve large expenditures. The capitalbudgeting is very important to firm’s future. The difference between capitalbudgeting and individual’s investment...

...FIN3101 Corporate Finance Practice Questions
Topic: CapitalBudgeting
1.
Marsh Motors has to choose one of two new machines. Machine 1 costs
$180,000, has a 3 year life and EBIT of $108,750 per year. Machine 2 costs
$360,000, has a life of 6 years and EBIT of $122,875 per year. Assume straight
line depreciation over the life of the machine. Marsh is a levered firm with a debt
equity ratio of 0.40. The beta of equity is 1.125 while the beta of debt is 0.25....

...supplier and that the Blue Ridge Mill would instead compete with the Shenandoah Mill by selling on the shortwood market. The question for Prescott was whether these expected benefits were enough to justify the $18 million capital outlay plus the incremental investment in working capital over the six-year life of the investment. Construction would start within a few months, and the investment outlay would be spent over two calendar years: $16 million in 2007 and the...

...CapitalBudgeting
Part I
PV= FV / (1+i)^y PV= present value, FV= future value, i= discount rate, and y= time.
1a) If the discount rate is 0%, what is the projects net present value?
Year Cash Flow Discount Rate Discounted Cash Flow
0 -$400,000 0% -$400,000
1 $100,000 0% $100,000
2 $120,000 0% $120,000
3 $850,000 0% $850,000
Answer: The projects net present value is $670,000
If the...

...CAPITALBUDGETING PROBLEM
BMW Bike is considering building a new plant. Juan Optimist, the company’s marketing manager, is an enthusiastic supporter of the new plant. Mila Pessimist, the company’s chief financial officer, is not so sure that the plant is a good idea. Currently the company purchases its skateboards from foreign manufacturers. The following figures were estimated regarding the construction of a new plant.
Cost of plant 4,000,000
Annual...

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