Mathematics and Statistics

Paper instructions:
Capital Budgeting Case

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%

Compute and analyze items (a) and (b) using a Microsoft® Excel® spreadsheet (see template). Make sure all calculations can be seen in the background of the applicable spreadsheet cells. In other words, leave an audit trail so others can see how you arrived at your calculations and analysis. Items (a) and (b) should be submitted in Microsoft® Excel®; including your recommendation in the Microsoft® Excel® spreadsheet.

a. A 5-year projected income statement (see row 11 in the template for company A)
b. A 5-year projected cash flow (see row 14 in the template for company A)

c. Based on items (a) through ( b), which company would you recommend acquiring? Discuss your answer in the Excel file next to your calculations in a few sentences.

Week 6 – Capital Budgeting Mini Case ANSWER SHEET See hints on calculations in green

CORPORATION A

YEAR 0 1 2 3 4 5
Revenues given in the problem
Expenses given in the problem
Dep. given in the problem
EBIT EBIT= Earnings Before Interest&Tax, i.e. revenue – expenses – depreciation in a given year
Tax apply the tax percentage to EBIT
Net Income i.e. EBIT – Tax
Add:
Depreciation given in the problem
CASH FLOW i.e. Net Income + Depriciation

CORPORATION B

YEAR 0 1 2 3 4 5
Revenues given in the problem
Expenses given in the problem
Dep. given in the problem
EBIT EBIT= Earnings Before Interest&Tax, i.e. revenue – expenses – depreciation in a given year
Tax apply the tax percentage to EBIT
Net Income pp i.e. EBIT – Tax
Add:
Depreciation given in the problem
CASH FLOW i.e. Net Income + Depriciation

Please note that this has to be done on an excel spreadsheet; I was having computer problems and are not sure the spreadsheet uploaded.

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