Decision Making and Capital Budgeting
1 Excel spreadsheet and 1 paper of 1,500–2,000 words
Based on the following information, calculate net present value (NPV), internal rate of return (IRR), and payback for the investment opportunity:
· EEC expects to save $500,000 per year for the next 10 years by purchasing the supplier.
· EEC’s cost of capital is 14%.
· EEC believes it can purchase the supplier for $2 million.
· Answer the following:
· Based on your calculations, should EEC acquire the supplier? Why or why not?
· Which of the techniques (NPV, IRR, or payback period) is the most useful tool to use? Why?
· Which of the techniques (NPV, IRR, or payback period) is the least useful tool to use? Why?
· Would your answer be the same if EEC’s cost of capital were 25%? Why or why not?
· Would your answer be the same if EEC did not save $500,000 per year as anticipated?
· What would be the least amount of savings that would make this investment attractive to EEC?
· Given this scenario, what is the most EEC would be willing to pay for the supplier?
Prepare a memo to the President of EEC that details your findings and shows the effects if any of the following situations are true:
· EEC’s cost of capital increases.
· The expected savings are less than $500,000 per year.
· EEC must pay more than $2 million for the supplier.
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