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Capital Budgeting Case

Learning Team B is considering acquiring another corporation. There are two different companies being considered, with the acquisition cost for each at $250,000. The information given for each business is as follows: Corporation A carries revenue of $100,000 for the first year and increases each year after that by 10%. The expenses for this corporation are $20,000 for the first year which will increase by 15% each year after that. The depreciation expense for Corporation A is $5,000 yearly, a tax rate at 25% and lastly, a discount rate of 10%. Corporation B, has a revenue for the first year of $150,000, which will increase by 8% yearly. In the first year, the ...view middle of the document...

Rationale and Support for Decision

The primary rationale for choosing Corporation B over Corporation A, is that the projected higher income in the 5-year analysis of cash flow and revenue. It comes down to money and how much it is going to take to pay off the loan for business with the discount percentage. Also, the Net Present Value (NPV) of Corporation B was $40,251.47 while on the contrary, Corporation A was $20,979.20 which plays a big role in the decision. The other main factor was the Internal Rate of Return (IRR), which was 13.05% for corporation A and 16.94% for Corporation B. What this means is that the Corporation B will get their return on investment at a quicker rate. Making back your investments and increasing one’s income is what business is all about. With this said, Corporation B is the best choice because it will produce better returns at a much quicker pace than Corporation A.

Relationship between NPV and IRR

The relationship between net present value (NPV) and internal rate of return (IRR) involves the discount rate used. NPV and IRR are used to determine which investments are best and which investments are harmful. NPV is expressed in monetary units and IRR is expressed as a percentage yield. NPV shows the discounted cash flow counted back to the...

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