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Calculation of various items for two corporations

I am thinking about aquiring another corperation.
I have two choices; the cost of each is $250,000.
I can not spend more than that, so acquiring both corperations is not an option.
The following is my critical data I have put togther for each:

Corperation A:
Revenues= 100K in year one, increasing by 10% each year
Expenses= 20k in year one, increasing by 15% each year
Depreciation Expense= 5K each year
Tax Rate= 25%
Discount Rate= 10%

Corperation B:
Revenues= 150K on year one, increasing by 8% each year
Expenses= 60K in year one, increasing by 10% each year
Depreciation Expense= 10K each year
Tax Rate= 25%
Discount Rate= 11%

I need to cumpute and analyze items (a) through (h) using a microsoft spreed sheet.
Could you please makesure all calculations can be seen in the background of the applicable spreedsheet cell, in other word leave an aduit trail so I can see how you arrived at your calculations.

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

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

In one or two pages could you define, analyze, and interpret your answers in items (c) through (h) with a rational behind each item and why it supports your decision in the company you recommended.

Describe the relationship between NPV and IRR.

Explain how you would analyze projects differently if corperation A & B had unequal projected years.

Solution Preview

The calculations are in the excel file and the reasoning is in the doc file.

Which company to acquire.

The table below lists the parameters for the two corporations as calculated in the excel file

Parameter Corporation A Corporation B
NPV 20,979 40,251
IRR 13.1% 16.9%
Period 3yrs 8 months 3 yrs 4 months
Index 1.08 1.16
Payback 4 yrs 7 months 4 yrs 4 months
MIRR 11.8% 13.9%

Since Corporation B is better on all parameters, it should be acquired.

The Net Present Value is found by adding the discounted cash inflows to the initial investment. The final figure so arrived is the NPV. The cash inflows are discounted using the rate given for each corporation. If the NPV is positive it means that the project is generating a surplus over and above all the costs, including the cost of capital. For choosing between 2 projects, the higher NPV project is taken up, since it gives more surplus. Therefore from NPV point of view Corp B is better.

The IRR is the discounting rate which makes the discounted cash flows equal to the initial investment. This rate gives the return that the project is giving on the invested capital. A project with a higher IRR is ...

Solution Summary

The solution uses Corporation A and Corporation B use calculate various capital budgeting parameters