This website uses cookies to ensure you have the best experience. Learn more

Capital Budgeting Case Essay

681 words - 3 pages

Capital Budgeting Case
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, ...view middle of the document...

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 to purchase was the IRR. With and IRR of 17% for Corporation B compared to the 13% for Corporation A, Corporation B was the logical choice. Based on the Capital budgeting the higher the IRR value, again the better choice for moving forward with an acquisition or purchase is advised. The information we were not given was our companies desired IRR percentage rate which would have given a better idea of which company would fit the companies IRR better.
By looking at the NPV and IRR we can determine if an acquisition, be it a company or a piece of equipment for a company, it can determine whether the acquisition is a good idea or not. For the purpose of this particular Capital Budgeting Case study it was clear that Corporation B is the corporation for our company to purchase, with a higher NPV and IRR Corporation B is the best acquisition.
The relationship of the NPV and IRR must both be looked at, since an IRR alone does not show if the NPV is positive, you must look at the two together. While the IRR is usually compared to a companies required rate of return, without looking at the NPV the IRR percentage could give a false belief that the project or acquisition is a good deal. If you have a negative NPV you should not move forward, regardless of the IRR. Yet if you have a positive NPV and a favorable IRR then a company should move ahead with the project or acquisition. The final deciding factor between these two companies was actually the discount rate. With Corporation A having a 10% discount, and Corporation B having an 11% discount, the number swayed to Corporation B. Had the discount been the same for both companies then Corporation A would have actually been the better acquisition.

Works Cited
Keown, A. J., Martin, J. D., & Petty, J. W. (2014). Foundations of Finance: The Logic and
Practice of Financial Management (8th ed.). Upper Saddle River, New Jersey: Pearson Education, Inc..

Other Papers Like Capital Budgeting Case

Capital Budgeting Essay

560 words - 3 pages Capital Budgeting Case NPV or net present value illustrated as the present value of an investment’s annual free cash flow less the investment’s initial outlay (Keown, Petty, & Martin 2014 Pg. 314). While assessing both Corporation A and Corporation B, NPV formula’s represented by (present value of all the future annual free cash flows) - (the initial cash outlay). Calculations of Corporation A, has a 10% rate of return and the

Capital Budgeting Essay

3031 words - 13 pages desirable way to raise capital. Faced with limited sources of capital, management should carefully decide whether a particular project is economically acceptable. In the case of more than one project, management must identify the projects that will contribute most to profits and, consequently, to the value (or wealth) of the firm. This, in essence, is the basis of capital budgeting. II. Basic Steps of Capital Budgeting 1. Estimate the

Capital Budgeting

786 words - 4 pages 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

Stryker Corporation: Capital Budgeting

1847 words - 8 pages Harvard Case Study Stryker Corporation: Capital Budgeting Term Paper Laini Tsang Golden Gate University MS Finance, FI 312 Summer 2013 Stryker’s Capital Budgeting Harvard Case Study Table of Content      Case Background and Summary Pharmaceutical Industry’s Landscape Stryker’s New CERS and why it is “painful”? Propositions Conclusions 2 Stryker’s Capital Budgeting Harvard Case Study Case Background and Summary

Risk Analysis on Investment Decision: Capital Budgeting

1218 words - 5 pages Capital budgeting involves planning a company’s future investments discovering feasibility whether or not to pursue the investments. A company may be lining up one or several investment options. In any case, several capital budgeting techniques are involved helping arrive at a good, sound financial investment decision. Several techniques include using net present value (NPV), internal rate of return (IRR), profitability index (PI), and

Fin 534: Financial Management Capital Budgeting

805 words - 4 pages Capital Budgeting Assignment 2 Ebony N. Robinson FIN 534: Financial Management January 30, 2011 Professor: Dr. Glenn L. Stevens Strayer University Abstract The Net Present Value rule states that when making an investment decision, choose the project with the highest NPV. If the objective is to maximize wealth, then “the NPV rule always gives the correct answer (Berk and DeMarzo, 2011).” According

A Common Question When Making a Capital Budgeting

1028 words - 5 pages financial balance sheet statement Making a choice from capital budgeting view perspective Leasing or buying is considered a critical decision-making to a firm. It is realized that some small and medium enterprise (SMES) cash flow is one of the critical assets for them to run or sustain a business (Anne & Scoot & Joseph, 2013). Whilst, firm financial have low cash flow, leasing will be their perfect solution to run the business whereby it

Capital Budgeting - 681 words

681 words - 3 pages Capital budgeting Acquisition investment HP should invest in an acquisition investment with Washington Electronics Corporation. Even though PH is among the upcoming electronic and technology company, its projected annual revenues ranges within $800,000 bracket. In the course of merging and other activities, there are substantial problems that are associated with the decision. Just like any other merging activity, in order to estimate the

Capital Budgeting - 4274 words

4274 words - 18 pages Capital Budgeting Practices MGMT 640 Section 9040 Professor J.Jain Executive Summary This essay discusses the importance of capital budgeting and analyzes the most common techniques. The most frequently used methods are the net present value (NPV) and internal rate of return (IRR). These are both tools that analyze the present value of the cost of a project as well as the present value of that projects future cash flows. An essential

Capital Budgeting - 2504 words

2504 words - 11 pages CAPITAL BUDGETING PROCESS HSM 340 3/30/12 Organizations that decide to issue bonds generally have six steps to go through. Let’s discuss them. The first step is for the issuer to select bond counsel and the underwriter or financial advisor. The issuer and the solicitor work with these participants to structure the financing. Some basic questions need to be answered: (1) what is the purpose of the issue -- to fund a capital project, to

Capital Budgeting - 2064 words

2064 words - 9 pages Capital Budgeting Techniques Mona School of Business Financial Management Lecturer: Kathya Beckford By the end of this session you will understand: 1. What capital budgeting is How to calculate and interpret a project’s:      2. Payback Period Discounted Payback Period Net Present Value (NPV) Internal Rate of Return (IRR) Profitability Index (PI) 3. How to choose projects when capital is rationed What is capital

Related Essays

Foreign Subsidiary Investment Plan Case: Multinational Capital Budgeting China & Australia

5529 words - 23 pages Foreign Subsidiary Investment Plan Case: Multinational Capital Budgeting China & Australia Hypothetical Incorporated MBA AF 626 Fall 2011 International Financial Management Professor XX XX XX XX XX Table of Contents PART I – Analysis: Australia vs. China A. Country Analysis 1. Economic Environment 3 2. Social Environment 10 3. Political Environment 12 B. Industry Analysis 1. Aluminum Industry in

Capital Budgeting Essay 567 Words

567 words - 3 pages , Summer 2004 pp 40 – 58 • Eljelly, A & Abuldris, A., 2001, A survey of Capital Budgeting techniques in the Public and Private Sectors of a less developed Country (LDC): The case of the Sudan, Journal of African Business, Vol. 2(1) 2001 pp 75 – 93 • Farragher, E., Klieman, R. & Sadu, A., 2001, The Association between the Use of Sophisticated Capital Budgeting practices and Corporate Performance. The Engineering Economist, Vol.46(4) 2001 pp 300

Capital Budgeting Essay 630 Words

630 words - 3 pages . Faced with limited sources of capital, management should carefully decide whether a particular project is economically acceptable. In the case of more than one project, management must identify the projects that will contribute most to profits and, consequently, to the value (or wealth) of the firm. This, in essence, is the basis of capital budgeting. II. Basic Steps of Capital Budgeting 1. Estimate the cash flows 2. Assess the

Capital Budgeting Essay 2791 Words

2791 words - 12 pages Introduction Capital budgeting is the decision-making process that establishes the goals and criteria for planning and investing a firm’s resources in fixed assets or long-term projects. Capital budgeting normally includes the evaluation of projects like land, building, facilities, equipment, vehicle fleets, and so on. Capital budgeting is important for the following reasons: 1. The size of the investments. As discussed throughout