Capital Budgeting Case

3. Using the cash flow indicator and investment valuation ratios, discuss which company is more likely to have satisfied stockholders.

EEC calculated the amount of time involved the anticipation of its cost ($3 million). The timeline in recovering their cost of investment ($2 million) initially for the foundation of this investment any profit made in the future of this investment will be justified as a profit for the company. If EEC can anticipate a fast return on its investment it is a profitable wise decision in making the investment financial, it is considered to be an easier way of formulating investments financially. On the basis of one year all cash flows is added together equal to the sum of $2 million originally invested, then it is divided by the annual cash flow of $500,000. The calculation of the payback period would equal four years. After this time frame any financial proceeds will be considered profitable for the company. I conclude that the timeframe is adequate in comparison of the investment in this worthwhile investment financial venture for the company.

For the corporation that has acquired another company, merged with another company, or been acquired by another company, evaluate the strategy that led to the merger or acquisition to determine whether or not this merger or acquisition was a wise choice. Justify your opinion.

When determining which company has the most to offer it is necessary to look at each set of numbers from several different views. For instance this paper will cover vertical and horizontal analysis, profitability, solvency, and liquidity ratios. I will be explaining how each set of results play into the decision making of which company would be best to invest in, by comparing both companies numbers in able to collect the necessary data to make a calculated decision.

Capital structure will not be affected when the divisions issue their own debt, but the corporation guaranteed the divisional debt. This is due to the fact that the parent company still carries the risk of each divisions projects.

IRR is the rate at which the net present value becomes zero (Ross, Westerfield & Jordan, 2013). Additionally, IRR is calculated first by determining the Net Present Value. The Net Present Value is the variance concerning the market value and its cost (Ross, Westerfield & Jordan, 2013). Net present value is calculated by first finding the present value. For instance, 21.83 million (year 1 revenue from above) divided by 1 plus the companies rate of return of 12%. Thus, 21.83/(1+.12)= 19.49 is the present value for year 1. Furthermore, by adding the total revenue over the next 5 years we get 21.85+ 28.025+36.875+30.975+23.6=132.325 million is the expected value of revenue. That amount now needs to be placed into the present value equation previously discussed only this time with the exponent of 5 to cover the next 5 years. 132.325/(1+.12)^5=75.08 (rounded). Moreover, if

The initial investment rate of return (IIRR) method also overlooks the time value of money. The IIRR method considers the effects of taxes and depreciation on investments. This is something that is overlooked by the payback method. The IIRR method however, does not take into account operating cash flow, which can be a significant consideration. Senior management is more likely to buy in if the IIRR is greater than the cost of capital to the organization (McCrie,

A target payback period will be set by the company and the proposals that recover their initial cost within this time will be acceptable. If a comparison is made between two or more options then the choice will be project with the fastest payback.

Internal rate of return (IRR) and Payback period “IRR of a project provides useful information regarding the sensitivity of the project’s NPV to errors in the estimate of its cost of capital” (Pierson et al.2011, pp.157).This proposal also shows the project is profitable by using Excel to get the IRR of 18.9%, which is

2. Do the financial statements for the two firms enable you to compare their performance? If not, what changes need to be made to ensure comparability?

4. Using Exhibit 4B evaluate the proposed acquisitions. Would you recommend purchasing all of the licenses? Why or why not? Explain Briefly

The analysis of statement of cash flows, EPS, and the analysis of National Software’s ratios will assist in determining the best course of action. The company has had a steady increase in net income as well as

Internal rate of return (IRR) is a rate of return on an investment. The IRR of an investment is the interest rate that will give it a net present value of zero.

Consider two five-year investments competing for funding, Investment A and Investment B. Which is the better business decision? Analysts will look first at the net cash flow streams from each investment. The net cash flow data and comparison graph appear below.

With the objective to understand the business performance of the two entities, we reviewed the 2007 financial statements of both company and tried to obtain some insight on the profitability and solvency of each entity.