Capital Budgeting- Case Study

Capital Budgeting- Case Study

A 5-year projected income statement

Net income for both corporations is given below in the tables. We have calculated this income by following the traditional procedure of developing income statement. It can be seen from the table that accumulated net income generated by the Corporation A is greater than Corporation A. Increased income of Corporation A is because of the increase in depreciation and taxes. Therefore, on the basis of Net income we may say that investing in corporation A is a better option than Corporation A.

Net Income Corporation A

Description

Year 1

Year 2

Year 3

Year 4

Year 5

Total

Revenue

$100,000

$110,000

$121,000

$133,100

$146,410

Less Expense

($20,000)

($23,000)

($26,450)

($30,418)

($34,980)

EBITDA

$80,000

$87,000

$94,550

$102,683

$111,430

Less Depreciation

-$5,000

-$5,000

-$5,000

-$5,000

-$5,000

EBIT

$75,000

$82,000

$89,550

$97,683

$106,430

Less Taxes (25%)

$18,750

$20,500

$22,388

$24,421

$26,607

Net Income (PAT)

$56,250

$61,500

$67,163

$73,262

$79,822

$337,997

Net Income (Corporation B)

Description

Year 1

Year 2

Year 3

Year 4

Year 5

Total

Revenue

$150,000

$162,000

$174,960

$188,957

$204,073

Less Expense

($60,000)

($66,000)

($72,600)

($79,860)

($87,846)

EBITDA

$90,000

$96,000

$102,360

$109,097

$116,227

Less Depreciation

-$10,000

-$10,000

-$10,000

-$10,000

-$10,000

EBIT

$80,000

$86,000

$92,360

$99,097

$106,227

Less Taxes (25%)

$20,000

$21,500

$23,090

$24,774

$26,557

Net Income (PAT)

$60,000

$64,500

$69,270

$74,323

$79,671

$347,764

A 5-Year Projected Cash Flow

Cash flow help companies in understanding the level of cash inflow and outflow talking placed in a year. Cash flow generating capacity of a corporation is necessary for achieving several investment goals. Evaluating the cash flow of an investment is also an integral part of capital budgeting techniques. It can be seen in the table of cash flow given below that the accumulated cash flow associated with corporation B is higher than Corporation A, hence making Corporation B more suitable investment opportunity.

Corporation A

Description

Year 1

Year 2

Year 3

Year 4

Year 5

Total

Revenue

$100,000

$110,000

$121,000

$133,100

$146,410

Expenses

($20,000)

($23,000)

($26,450)

($30,418)

($34,980)

Less Depreciation

$5,000

$5,000

$5,000

$5,000

$5,000

EBITA

$75,000

$82,000

$89,550

$97,683

$106,430

Tax Rate

($18,750)

($20,500)

($22,388)

($24,421)

($26,607)

25%

$56,250

$61,500

$67,163

$73,262

$79,822

Depreciation

$5,000

$5,000

$5,000

$5,000

$5,000

Cash Flow

$61,250

$66,500

$72,163

$78,262

$84,822

$362,997

Corporation B

Description

Year 1

Year 2

Year 3

Year 4

Year 5

Total

Revenue

$150,000

$162,000

$174,960

$188,957

$204,073

Expenses

($60,000)

($66,000)

($72,600)

($79,860)

($87,846)

Depreciation

($10,000)

($10,000)

($10,000)

($10,000)

($10,000)

EBITA

$80,000

$86,000

$92,360

$99,097

$106,227

Tax Rate

($20,000)

$21,500

$23,090

$24,774

$26,557

25%

$60,000

$64,500

$69,270

$74,323

$79,670

Depreciation

$10,000

$10,000

$10,000

$10,000

$10,000

Cash Flow

$70,000

$74,500

$79,270

$84,323

$89,670

$397,763

NPV

NPV is one of the most useful tools that companies uses to evaluate the profitability and acceptability of a project. Given below is ...