Capital Budgeting Comparison Essay

708 Words May 6th, 2015 3 Pages
Capital Budgeting Comparison
The capital budget team was created to determine which existing other corporation would be the best choice to acquire. The total amount of funds that can be used is $250,000, which either Corporation A or Corporation B can be purchased but not both. Before acquiring another group to implement with the exist organization, a detailed analysis of data is to be done. An example of this is when ServiceMaster acquired Certified Systems Inc. or CSI, which was America’s ninth largest professional employer organization or PEO (Buchan, 1997). According to the article ServiceMaster acquires Professional Employer Organization, acquiring a company “is consistent with our plan to enter new markets with high growth
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I argue that when a firm experiences financial distress, news about cash flows becomes more dominant in driving its stock returns. Applying Campbell’s (1991) variance decomposition framework to financially distressed firms supports this argument. Furthermore, I find that more bankruptcies occur after negative shocks to expected cash flows than after positive shocks to discount rates; and that stock prices of distressed firms are less sensitive than those of sound firms to changes in equity risks.” With that as a reference, comparing cash flow between the organizations is that Corporation A had a 5 year cash flow of $112,997 and Corporation B had a cash flow of $147,763 which shows Corporation B should be a more productive organization. The team’s analysis will next present the net present value (NPV) which Corporation A is calculated to be a NPV of $20,979.20 but Corporation B has a higher calculated NPV of $40,251 which helps to determine that Corporation A has an internal rate or return (IRR) of only 13% and Corporation B has a 25% IRR. The analysis shows that Corporation B has more value of an organization and a better option to acquire.

Rationale Behind Each Item
The analysis of the data between shows the better results are with Corporation B, so a comparison in differences shows the rationale behind each item of income, cash flow, net present value and internal rate of return.

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