To: Mr. Leonard Shelton
Date: October 14, 2007
Subject: Analysis of Company A and B Capital Budgeting Project Decision
Company C is considering expanding their business and has been in discussions with company A and company B over the past few months. Although company C has limited resources to invest in the additional business they want to ensure that they will be maximizing the return on their investment.
The following analysis will examine key financial points and projections for company A and company B. The analysis will examine company revenues, expenses, depreciation expense, tax rate and discount rate. The recommendation to purchase will
Based on the five year projected financials for the companies.
Key Financial Terms
Revenues are a fundamental component of a companies Balance sheet. For a company this is the total amount of money received by the company for goods sold or services provided during a certain time period. It also includes all net sales, exchanges of assets; interest and any other increase in owner’s equity and is calculated before any expenses are subtracted (Finance 2007).
Expenses measure the efficiency of the company’s operations and is the total money, time
and resources associated with a purchase or activity.
Depreciation Expense is a non-cash expense that reduces the value of an asset as a result.
There are several accounting methods that are used in order to write off an asset's
depreciation cost over the period of its useful life. Because it is a non-cash expense,
depreciation lowers the company's reported earnings while increasing free cash flow.
The Net present Value (NPV), is the present value of an investment’s future net cash flows minus the initial investment. If positive, the investment should be made (unless an even better investment exists), otherwise it should not.
The Internal Rate of return (IRR) is defined as, the rate of return that would make...