Question description
Part 2
Based on the following information, calculate net present value
(NPV), internal rate of return (IRR), and payback for the investment
opportunity:
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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.
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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?
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Prepare a memo to the President of EEC that details your
findings and shows the effects if any of the following situations are true:
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