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Acquisition Budgeting Case
Our organization is planning to acquire additional companies. 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:
Company 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%
Company 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%
1. Compute and analyze items (a) through (d) using a Microsoft® Excel® spreadsheet. Make sure all calculations can be seen in the background of the applicable spreadsheet cells. Leave an audit trail so others can see how you arrived at your calculations and analysis. Items (a) through (d) should be submitted in Microsoft® Excel®; indicate your recommendation (e) in the Microsoft® Excel® spreadsheet;
a. A 5-year projected income statement
b. A 5-year projected cash flow
c. Net present value (NPV)
d. Internal rate of return (IRR)
e. Based on items (a) through (d), which company would you recommend acquiring?
2. Create a Micosoft® Excel® spreadsheet for each company that describes the relationship between NPV and IRR (the key factor is the discount rate used). Also show projections and calculations.