Capital Budgeting Case
Your company is thinking about acquiring another corporation. You have two choicesâ€”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:
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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%
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 MicrosoftÂ® ExcelÂ® 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 MicrosoftÂ® ExcelÂ®; indicate your recommendation (e) in the MicrosoftÂ® ExcelÂ® 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?