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Type: Individual Project Unit: Decision Making and Capital Budgeting Deliverable Length: 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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Explanation & Answer

Attached.

Computation of NPV
Given that the cost of capital=14%
Initial outlay= $2000,000
Annual cash flow= $500,000
cash
Year
flow
1 500,000
2 500,000
3 500,000
4 500,000
5 500,000
6 500,000
7 500,000
8 500,000
9 500,000
10 500,000
Present Value (PV)
P{1-(1+r)^-n}/r
500,000{1-(1.14)^-10}/.14
500,000(0.7303)/.14
=0.7303/.14=5.2164*500,000
Present value= $2,608,214
Net present value= 2608214-2000000
= $608,214
Computation of IRR
IRR= r1+ NPV1*(r2-r1)
NPV1-NPV2
Where r1= lower cost of capital
r2= higher cost of capital
npv1= npv at r1
npv2= npv at r2
Therefore taking lower cost of capital to be= 15%
And the higher capital be= 25%
Using the formula, npv at 15%= {500000*(1-0.2472)}/0.15= $250938.43
Pv at 15%= $2509385.3 NPV=509385.3
and thus ;. At r=25%
{500,000*(1-0.1073)}/0.25
=$1785251.635 and NPV = -214748.36
So, 0.15+(509385.3*0.1)
509385.3+214748.36
0.15+50938.53
724134
TRUE

IRR is approximately equals to 22.03%
Payback period

Year
Cash
flow
Discount
ed cash
flow
Cumulative cash
flow

0

1

2

3

4

5

6

-2000000

500000

500000

500000

500000

500000

500000

2000000

438596

384734

337486

296040

259684

227793

2000000 -1561404 -1176670 -839184 -543144 -283460

-55667

Payback period= 6+ (55667/199819)
=6.2 years

7

8

9

10

500000

500000

500000

500000

199819

175279

153754

134872

Name
Institutional Affiliation
Course
Date

In the recent past, the president of EEC convened a meeting to introduce the biggest
supplier of components part had requested them in respect to the possibility of purchasing of
suppliers. The president, therefore, demanded that we analyze the opportunities to procure the
suppliers
Information’s Necessary for Analyzing the Investments Opportunities
It would be essential for us to research on potential investments as the EEC greatest
interest is to conduct a financial analysis for prospective investments which include the firm's
non-financial features of investments. The studies would give out data's such as economic
analysis which is necessary for ascertaining incrementally which means that additional cash-flow
is connected to investments. More so, the financial reports would bring out a clear picture of both
short and long-term implication of the times as well as investments in specific durations which
will reveal finances to pay off.
Workers are expected to evaluate non-financial characteristics be...