Capital Budgeting
Renald Breville
QRB 501
April 4, 2015
Professor Joseph Oloyede
Capital budgeting is a process which companies use to evaluate the best cost effective planning for expenditure. Most companies use this tool when deciding on property, gaining asset and sometimes stocks. My company is thinking about acquiring another corporation. The cost of each corporation is about $250,000 and our budget is $250,000. Only one property can be bought and critical data has been presented when making the decision.
“Corporation A” states that its revenue per year will be $100,00 and the profit will increase by 10% each year. Expenses are at $20,000 and will increase at 15% per year. The property will face depreciation of $5000 per year and at that rate each year. There will be a steep tax rate of 25% and a discount rate of 10%. “Corporation B” on the other hand, states that its revenue per year will be at $150,00 0 and the profit will increase by 8% each year. Expenses are at $60,000, and will increase at 10% per year. The property will face depreciation of $10,000 per year and will remain at that rate after. The tax rate will be at 25% and a discount rate of 11%.
“The NPV or Net Present Value is the difference between the present value of cash inflows and the present value of cash outflows”. “Investopedia” (2014). NPV is used in capital budgeting to analyze the profitability of an investment or project. According to NPV “Corporation A” seems to be a better choice although its revenue is profiting by $10,000 the first year and Corporation B revenue is at $12,000. The expense for corporation A is only at $20,000 compared to Corporation B; which is at $60,000. When choosing between the two, it is best to compare the expenses as well as revenues.
Furthermore, the “IRR or the Internal Rate of Return is the discount rate often used in capital budgeting that makes the net present value of all cash flows from a particular project equal to zero”. “Investopedia” ,
