You are the Director of Accounting & Controls for Company XYZ and your boss the VP/Controller has asked you to review a pending transaction that has two potential targets. Your company is trying to decide which target is a better fit both financially and culturally. Below, you will find the facts of the case and the question that needs to be addressed.

Section I - Financials & Metrics as of 12/31/XX

In $000's Target A Target B

Sales $535,500 $698,000$

COS $485,700 $489,000$

Margin $49,800$ $209,000$

SG&A $30,000$ $15,000$

EBIT $19,800$ 4194,000$

Weight Average Cost of Capital 10% 10%

Net Present Value - Discounted Cash Flow $225,000 $434,000$

Payback Period 10 years 8 years

Collection Days 45 days 30 days

Inventory Turnover 12 4

Working Capital Turnover 8.5 5

Cash $50,000 $150,000

Accounts Receivable, net $100,000 $120,000

Debt $10,000 $100,000

Equity $100,000 $ 50,000

Section II - Due Diligence Findings

Financial Control Environment Excellent Poor

Pending Legal Issues (likelihood >50%) Properly Accrued Under Accrued

Environmental Issues Properly Accrued Lack of Documentation

HR Involvement & Responsiveness Poor Average

Operational Environment Poor Excellent

Business Practices & Ethics Poor Average

Which target would you recommend and why?

Please explain thoroughly.