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 corporations 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%
For each corporation, forecast the income statements for the next five years. Use the income statements to determine OCF for the next five years.
Find NPV, discounted payback period, payback period, IRR, and profitability index using the operating cash flows as the “project” future cash flows and $250,000 as the required initial investment for each target corporation.
Write a memo in which you make a recommendation for which corporation to acquire based on a summary of your above analysis.