420 WordsNov 15, 20142 Pages

Capital 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 of 10%. These numbers were crucial in finding the NPV (net present value) and IRR (internal rate of return).
Corporation “A” had a $100,000 operating revenue and I had to first figure out earnings before interest and tax so I could come out with taxes owed. By deducting cash expenses and depreciation I came up with the EBIT in which now I just multiplied by 25% tax rate. Now by deducting the EBIT I can figure out the net earnings and adding the depreciation back I got the C.F. OP. Now I had to figure out the discount rate and did all this for five years so I could show the NPV and IRR. All these same steps were done for Corporation “B” to find out which company is worth acquiring.
The net present value for company “A” was $29,425.85with a IRR of 6% while company “B” had a NPV of $12,656.03 with an IRR of 13%. Company “B” has a lower NPV than Company “A” but the internal rate of return is 13% to only 6% for company “A”. So if I’m reading this correctly I would choose Company “A” due to NPV is significant higher. The higher rate of return would be a factor also because company “B” stands to make more money in the long run but we want our return on investment quicker.
IRR is a percentage that will go with NPV most of the time but sometimes you get conflicting directions telling you to choose Company “A” over Company “B”. IRR can have two problem areas such as more than

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