Problem: This is an application of capital budgeting that integrates the projection of a basic cash flow and the computation and analysis of six capital budgeting tools.
Your company is thinking about acquiring another corporation. You have two choices; the cost of each choice is $250,000. You cannot spend more than that, so acquiring both corpo-rations is not an option. The following are your critical data:
a. Corporation A:
1) Revenues = 100K in year one, increasing by 10% each year.
2) Expenses = 20K in year one, increasing by 15% each year.
3) Depreciation Expense = 5K each year.
4) Tax Rate = 25%
5) Discount Rate = 10%
b. Corporation B:
1) Revenues = 150K in year one, increasing by 8% each year.
2) Expenses = 60K in year one, increasing by 10% each year.
3) Depreciation Expense = 10K each year.
4) Tax Rate = 25%
5) Discount Rate = 11%
You must compute, analyze, and submit items (a) through (g) in a spreadsheet format and answer questions in (h) and (i) in Microsoft Word format.
c. A 5-year projected income statement
d. A 5-year projected cash flow
e. Net Present Value
f. Internal Rate of Return
g. Payback Period
h. Based on items (a) through (g), which company would you recommend acquiring?
i. In a 800-1,200-word memo, define, analyze, and interpret the answers to items (c) through (g). Present the rationale behind each item and why it supports your decision stated in item (h). Also, attempt to describe the relationship between NPV and IRR.