# Capital Budgeting Case: QRB/501 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:

Corporation A:

Revenues =    100,000 in year one, increasing by 10% each year.

Expenses =    20,000 in year one, increasing by 15% each year.

Depreciation Expense = 5,000 each year

Tax Rate =   25%

Discount Rate = 10%

Corporation B:

Revenues = 150,000 in year one, increasing by 8% each year.

Expenses = 60,000 in year one, increasing by 10% each year.

Depreciation Expense = 10,000 each year.

Tax Rate =   25%

Discount Rate = 11%

You must compute and analyze items (a) through (h) using a Microsoft Excel spreadsheet. Make sure that all calculations

can be seen in the background of the applicable spreadsheet cells. In other words, leave an audit trail so that others can

see how you arrived at your calculations and analysis. Items (i), (j), and (k) should be submitted in Microsoft Word.

a. A 5-year projected income statement

b. A 5-year projected cash flow

c. Net Present Value

d.     Internal rate of return

e.     Payback Period

f.     Profitability Index

g.     Discounted Payback Period

h.     Modified Internal Rate of Return

i.     Based on items (a) through (h), which company would you recommend acquiring?

j.     In a 1,050-1,500-word memo, define, analyze, and interpret the answers to items (c) through (h). .

In that same memo, present the rationale behind each item and why it supports your decision stated in item (i). Also, attempt to describe the relationship

between NPV and IRR. (Hint: The key factor here is the discount rate used.) In this memo, explain how you would analyze

projects differently if they had unequal projected years (i.e., if Corporation A had a 5-year projection and Corporation B had a

7-year projection)