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Submitted By westfire

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Words 664

Pages 3

Shawn P. Oeser

QRB/501

October 7, 2013

David Gobeli

Capital Budgeting Case

For the final week of QRB/501 we were asked to complete a Capital Budgeting Case based on two possible corporations for our company. Based on the 5 year projected income statement, 5 year projected cash flow, Net Present Value (NPV), and Internal Rate of Return (IRR); we were to determine which company would be the wiser acquisition. After completing the analysis it was determined that Corporation B would be the proper choice of the two corporations. According to our text the NPV, “of an investment proposal is equal to the present value of its annual free cash flows less the investment’s initial outlay” (Keown, Martin, & Petty, 2014, p. 310), therefore determining the NPV value of each company is a step needed in determining the whether either company was worth the initial investment. The next step was determining the companies IRR, which is defined in our text as, “the internal rate of return 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, Martin, & Petty, 2014, p. 310). Yet these were not the only determining factors, we also were required to look at the projected 5-year cash flow and the projected 5-year income statement. When comparing the NPV of both corporations it was clear that the NPV of Corporation B was almost double that of Corporation A at $36,262.58 and $19,072.00 respectively. The NPV, being based on free cash flows therefore shows a better valuation of a company than just looking at the accounting profits. Since both companies had a positive NPV they are both worthwhile companies for acquiring, but with the higher NPV of Corporation B , this makes it the company with the better rewards.

The area that clinched Corporation B as the company…...

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