Capital Budgeting Essay

IntroductionThe purpose of this paper is to analyze and see the answers of the Capital Budgeting Case. I give discuss my recommendation about which mountain and investor should acquire based on the quantitative reasoning. I also will describe the relationship between the displace present value and the intrinsic rate of return for the two good deals that are analyzed.Capital Budgeting CaseA company is planning in acquiring a new corporation and there are two options with the same cost of $250,000 but twain with different 5-year go outions of cash flows. The evaluation done to the two corporations (A and B) is based on the Net Present Value (NPV) and the Internal Rate of Return (IRR).The net present value represents the value the project or investment numbers to the investor wealth. The NPV regularity of capital budgeting suggests that all projects that have positive NPV should be accepted because they would add value to the investment. On the other hand, the internal rate of return is delimitate as the discount rate that equates the present value of a projects cash inflows to its outflows. According to the internal rate of return manner of capital budgeting, the investment should be accepted if their IRR is greater than the cost of capital.The results for passel 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 distinguish the one with the highest NPV.Therefore, I would recommend acquiring the political party B because it has a high NPV than the other company. Corporation B will be self-aggrandising us a current value cash return of $40,251.47 in a higher place our 11% required rate of return during the next 5 years. And, if we cypher the NPV using the IRR o f 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 borrowing or rejection.ConclusionIn conclusion, the best recommendation is to acquire Company B because it will give us higher current set during the first 5 years and higher returns of the investment.