Capital Budgeting Case
University of Phoenix
This paper will defines, analyze and interpret the answers to items (c) and (d) of the Capital Budgeting Case Study. The paper will also presents the rationale behind the Net Present Value (NPV) and Internal Rate of Return (IRR) results, describes the relationship between the two and explains the reasons behind the acquisition recommendation (e) in the Microsoft Excel spreadsheet. Analyzing the Results
The case study presents corporations A and B with different revenue values, expenses, variable depreciation expenses, tax rates, and discount rates. Both corporations’ cash flow, NPV and IRR value were computed using a Microsoft Excel spreadsheet. The net present value (NPV) of an investment proposal is equal to the present value of its annual free cash flows less the investment’s initial outlay. Whenever the project’s NPV is greater than or equal to zero, we will accept the project; whenever the NPV is negative, we will reject the project (Keown, 2014. p. 310.) If the project’s NPV is zero, then it returns the required rate of return and should be accepted (Keown, 2014. p. 310.) The internal rate(IRR) of return is defined as the discount rate that equates the present value of the project’s free cash flows with the project’s initial cash outlay(Keown, 2014. p. 316.) If the IRR on a project is equal to the firm’s required rate of return, then the project should be accepted because the firm is earning the rate that its shareholders are demanding (Keown, 2014. p. 316.) As stated on the Microsoft Excel spreadsheet Corporate B would be the best company to acquire because shows a better increase in profit over the next 5 years. Corporation A had an NPV value of $20,979.20 with an IRR value of 13%. Corporation B had an NPV value of $40,251.47 with an IRR value of 17%. Corporate A and B has a positive NPV result...
References: Keown, A. J., Martin, J D., & Petty, J. W. (2014). Foundations of Finance (8th ed.). Upper Saddle
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