495 WordsSep 16, 20142 Pages

Capital Budgeting Case
Virginia Sacco
University of Phoenix
Quantitative Reasoning for Business
QRB 501
Li Guohong
March 10, 2014
Capital Budgeting Case
My company is contemplating to acquire another corporation, “Corporation A” or “Corporation B” on a $250,000 budget.
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%.
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 (Keown, A. J., Martin, J. D., & Petty, J. W. (2014). The rule here is that our company will accept projects with a net present value greater than zero, and decline the ones with a net present value that is less than zero. The greater the net present value, the more appropriate the investment is. Based on that, Corporation B is desirable to Corporation A as it has a greater net present value.
The Internal Rate of Return (IRR) 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, A. J., Martin, J. D., & Petty, J. W. (2014). Based on the Internal Rate of Return rule, an investment is suitable if the Internal Rate of Return exceeds the required return, it should be rejected otherwise. Based on that, Corporation B is preferred over Corporation A since the former has a higher Internal Rate of Return.
Examining the above, the Net Present Value and the Internal Rate of Return are closely related.

Related

## Capital Budgeting Essay

2903 Words | 12 PagesCapital Budgeting Capital budgeting involves planning a company’s future investments discovering feasibility whether or not to pursue the investments. A company may be lining up one or several investment options. In any case, several capital budgeting techniques are involved helping arrive at a good, sound financial investment decision. Several techniques include using net present value (NPV), internal rate of return (IRR), profitability index (PI), and equivalent annuity. However the process and

## Capital Budgeting Essay

474 Words | 2 PagesCapital Budgeting FIN475/Managerial Finance II November 4, 2007 Capital Budgeting Capital budgeting is the process of planning the used of an organization investment. In addition, it determines the organization’s long-term investments for example new plants, new machinery, replacement machinery, new products, and research and development projects. There are many formal methods to use in capital budgeting, including the techniques such as Net present value, profitability index, internal

## Capital Budgeting Essay

440 Words | 2 Pagesinvestment of 10 million for the cost of the building, and a salvage of 14 million at the end of the life. Reviewing the first set of data on the excel attachment shows the net present value with a cost of capital at a 10% weighted average. The first table shows NPV as a negative $3,680,709 for the capital project in which means the project would create a decrease in the company. Developing a reduction in the company causes the stockholders to lose money. The new factory has an expectant life of 10 years

## Capital Budgeting Essay

1045 Words | 5 PagesDevry University | Capital Budgeting Process | | | KAY | 6/8/2013 | HSM340 – Week 5 Assignment – Prof. Williams | Capital Budgeting Process Organizations that decide to issue bonds generally go through a series of steps. Discuss the six steps. The six steps are as followed. * The healthcare provider attempts to “get the house in order”. The borrower evaluates and updates its capital plan, measures its debt capableness and attempts analysis its financial records and statements

## Capital Budgeting Essay

2114 Words | 9 PagesCHAPTER 6—CAPITAL BUDGETING TECHNIQUES TRUE/FALSE 1. Beyond some point, a further increase in the size of the firm's total capital budget may lead to a decrease in the NPVs of all the investments being considered. 2. One advantage of the payback period method of evaluating fixed asset investment possibilities is that it provides a rough measure of a project's liquidity and risk. 3. The internal rate of return is that discount rate which equates the present value of the cash outflows (or costs)

## Capital Budgeting Essay

1161 Words | 5 PagesCapital Budget Recommendation Managerial Accounting and Legal Aspects of Business/ACC543 May 24, 2010 Professor Anissa DeRieux Capital Budget Recommendation Guillermo Furniture is a furniture store in Sonora, Mexico that supplies a variety of hand-made tables and chairs to its customers. Guillermo Furniture Store total assets for the year ending December 31, 2008 is $1,343,578 and $1,347,188 for the year ending December 31, 2009. Guillermo Navallez, the owner, has request that I

## Capital Budgeting Essay

944 Words | 4 PagesAnswer 'Capital Budgeting' Step into the shoes of a financial analyst. Discuss which steps of the capital budgeting process you would find the most challenging and state why. Discuss the pros and cons of applying different investment decision rules when faced with the choice of investing corporate funds. Provide two examples Capital Budgeting is a process of long range planning involving investment of funds in long term activities whose benefits are expected over series of years. For example

## Capital Budgeting Case Essay

420 Words | 2 PagesCapital Budgeting Case QBR/501 Capital Budgeting Case Given two separate companies to compare I had to first crunch the numbers using the information on both companies that were proposed. The spending limit was $250,000 and I could not go over that amount. Corporation “A” had revenues equaling $100,000 in year one but increasing by 10% each year. It also had expenses of $20,000 and increasing by 15% each year. The depreciating expense is $5000 each year with a tax rate of 25% and discount rate

## Capital Budgeting Essay

690 Words | 3 PagesCapital Budgeting Student’s Name Grade Course Tutor’s Name 14, 10, 2014 Outline 1. Introduction 2. Capital budgeting techniques 3. References Introduction “Capital budgeting is a planning process used to determine whether an organization's long term investment projects are worth the funding of cash through the firm's capitalization structure (debt, equity or retained earnings)” (Gervais, Heaton & Odean, 2011, p. 1737). Resources are naturally scarce. Therefore

## Capital Budgeting- Essay

1794 Words | 8 Pages2303-Financial management Capital Budgeting Capital Budgeting The term capital refers to the purchase of fixed assets or investment in certain projects and the term budget is a plan of all expected cash outflows and inflows over some future period of time. The term “capital budget” is an outline of planned expenditures. The term “capital budgeting” is a process of analyzing all the projects and deciding whether they should be included in the capital budget. Capital budgeting applications Examples:

### Capital Budgeting Essay

2903 Words | 12 Pages### Capital Budgeting Essay

474 Words | 2 Pages### Capital Budgeting Essay

440 Words | 2 Pages### Capital Budgeting Essay

1045 Words | 5 Pages### Capital Budgeting Essay

2114 Words | 9 Pages### Capital Budgeting Essay

1161 Words | 5 Pages### Capital Budgeting Essay

944 Words | 4 Pages### Capital Budgeting Case Essay

420 Words | 2 Pages### Capital Budgeting Essay

690 Words | 3 Pages### Capital Budgeting- Essay

1794 Words | 8 Pages