Question

Two companies, A and B, decide to acquire asset worth $15 million. Company A decides to purchase the asset whereas Company B will develop internally by its R&D unit with $15 million expenses in Year 1. The asset has a limited life of 3 years with no salvage value and hence will be amortized over 3 years using straight line. Create income statement, balance sheet and cash flow statement for both companies and calculate net profit margin and return on assets.

	Company A (Purchased)				Company B (Internally Developed)
	Year 0	Year 1	Year 2	Year 3	Year 0	Year 1	Year 2	Year 3
Income statement
Revenue		100	100	100		100	100	100
Cash exp exc. R&D		50	50	50		50	50	50
R&D
Depreciation
Income before taxes
Taxes – 30%
Net income
Cash flow statement
Cash from operations:
Net income
Depreciation
Cash from investing
Change in cash
Balance sheet
Cash	15				10
Gross PPE	0				0
Depreciation
Net PPE	0				0
Total assets	15				10
Retained earnings	0				0
Common stock	15				10
Total equity	15				10
Net profit margin
Return on assets

Answer 1