Capital Expenditures Essay -- Finances Financial Corporations Essays

Capital ExpendituresCapital expenditures have a significant impact on the financialperformance of the soaked therefore, criteria for selecting havesmust be evaluated with great care. Of the two corporations the unfluctuating isdeciding to acquire, weed B is clearly the better coronation asshown in Table 1 supported by the following data profit present set(NPV), internal rate of return (IRR), payback finale, profitabilityindex (PI), discounted payback period, and circumscribed internal rate ofreturn (MIRR) in addition to 5 year projections of income and changeflows. The 5 year projections of both Corporations A and Bs incomestatements and cash flows indicate that between the two corporations,Corporation B will maximize the levels value the most. This decisionis further evidenced by the net present value obtained for bothcorporations. NPV is defined as the sum of the present values of theannual cash flows minus the initial investment. If the net presentvalue (NPV) of all cash flows is positive, the project will beprofitable. The NPVs for both corporations suggest that both projectsare worthwhile, since each has a positive NPV, however, since the firmcan wholly acquire one of the corporations, it must choose theacquisition of the corporation with a higher NPV Corporation B.The Internal Rate of Return, IRR, is another business tool use forcapital budgeting decision. IRR is the discount rate at which thepresent value of a series of investments is equal to the present valueof the returns on those investments (NPV = 0). It is the compoundreturn the firm will get from the project. IRR also takes into accountthe time value of money by considering the cash flows over thelifetime of a project. If IRR is greater than the discount rate, thefirm may undertake the project in question. In this situation,acquisition of either corporation is worthwhile since each has an IRRgreater than their respective discount rates, but since IRR gives theprojects compound rate of return, the project providing the highercompound rate of return should be selected which means thatCorporation B is preferred to Corporation A. twain NPV and IRR analysessupport the acquisition of Corporation B. In cases where a conflictexists between NPV and IRR as to which competing projects to choose,the project with the larger NPV should ... ..., the main concern should beon how the investment will affect the value of the firms stock moreso than how long it takes to recover the investment that presupposesthat the project does add value for stockholders.When victimization the payback period as a criterion for capital budgetingdecision, it is better to use the discounted payback as it takes intoaccount the time value of money although however inferior to NPV. Inboth projects, the initial cost is recovered even after discountingthe cost of capital. In this situation, however, the difference indiscounted payback period is negligible. In summary, after review of the 5 year project ions of cash flows forboth corporations and all other supporting data provided in thisreport, the firm should proceed with the acquisition of Corporation B.Had the firm have unequal projected years available to them forreview, for instance, Corporation A had a 5 year projection of cashflows and Corporation B with a 7 year projection of cash flows, thedecision outcome should be no different since analysis of NPV, IRR,MIRR, PI, payback period and discounted payback period will be carriedout for the respective cash flows.