Capital Budgeting Essay Example for Free

Capital Budgeting EssayIntroductionThe purpose of this paper is to analyze and check the answers of the Capital Budgeting Case. I volition discuss my recommendation about which Corporation and investor should acquire found on the quantitative reasoning. I also testament describe the relationship between the net present quantify and the internal step of return for the two corporations that are analyzed.Capital Budgeting CaseA company is preparedness in acquiring a new corporation and there are two options with the same equal of $250,000 but both with different 5-year cast offions of cash flows. The evaluation done to the two corporations (A and B) is based on the moolah Present Value (NPV) and the Internal Rate of Return (IRR).The net present value represents the value the project or investment channels to the investor wealth. The NPV method of majuscule budgeting suggests that all projects that have confirmatory NPV should be accepted because they would add value to the investment. On the other hand, the internal rate of return is defined as the discount rate that equates the present value of a projects cash inflows to its outflows. According to the internal rate of return method of capital budgeting, the investment should be accepted if their IRR is greater than the cost of capital.The provides for Corporation A shows a NPV of $20,979.20 based on discount rate of 10%. And, we got an IRR of 13.05% which means that is the discount rate that makes the NPV equal or close to $0.00. On the other hand, the Corporation B with a discount rate of 11% got a NPV of $40,251.47 and an IRR of 16.94%. A positive NPV is considered a good project, and we want to choose the one with the highest NPV.Therefore, I would recommend acquiring the Company B because it has a higher(prenominal) NPV than the other company. Corporation B will be giving us a current value cash return of $40,251.47 above our 11% required rate of return during the future(a) 5 years. And, i f we recalculate the NPV using the IRR of 16.94% it will result on an NPV close to $0.00.The relationship between NPV and IRR is based on the discount rate used to bring up the cash flows to the present. For the case of Company B, with the discount rate of 11%, if we have a NPV of $0.00, our IRR will also be 11%. But, if our NPV is higher than $0.00, our IRR will be also higher than 11%. And, if we have a negative NPV, then our IRR will be less than 11%. In other words, the NPV and the IRR most of the time yield the same result of acceptance or rejection.ConclusionIn conclusion, the best recommendation is to acquire Company B because it will give us higher current values during the first 5 years and higher returns of the investment.