Capital Budgeting

Topics: Net present value, Cash flow, Internal rate of return Pages: 2 (491 words) Published: October 5, 2014
Team A Capital Budgeting Case Study

University of Phoenix

Team A Capital Budgeting Case Study
It is always a hard choice for a company when deciding on acquiring another company. What makes it even harder is having to choose between several companies as a lot of research must take place in order to analyze each company to see which is the best choice for the acquiring company. In the current case study Team A is recommending purchasing Corporation A based on a 5 year projected income statement and cash flow statement as well as each Corporation’s NPV and IRR.

The net present value represents the project adds to shareholder wealth. The net present value is also the present value of future cash returns. In order to find the net present value, the present value of cash flows and sum of discounted cash flows has to be determined. Finding the present value of cash flows includes the revenue minus the expenses, depreciation, and tax. The same applies for the next five years except there is a 10% increase with each year. After the cash flow is determined, there is a 10% discount that needs to be applied to represent the discounted cash flow. When all of these factors are determined, the some of the discounted cash flows will result in the net present value. The net present value for Corporation A is $20,979.20. This is because the cash flow for years 1, 2, 3, 4, and 5 are $61,250, $66,500, $72,163, $78,262, and $84,822 respectfully. The discounted cash flow for years, 1, 2, 3, 4, and 5 are $55,682, $54,959, $54,217, $53,454, $52,668 respectfully. Once the cash flows are found, the net present value is determined by the sum of the discounted cash flow.

The internal rate of return is the discount rate to the present value. The internal rate of return determines the total percentage return that the dollar amount represents. The internal rate of return is crucial to capital budgeting because it maintains everything. It shows that the project...
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