The president of eec recently called a meeting to announce

Question

The President of EEC recently called a meeting to announce that one of the firm's largest suppliers of component parts has approached EEC about a possible purchase of the supplier. The President has requested that you and your staff analyse the feasibility of acquiring this supplier. 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, payback period) is the most useful tool to use? Why?

Which of the techniques (NPV, IRR, 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? 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 detailing your findings and showing the effects if:

(a) EEC's cost of capital increases

(b) the expected savings are less than $500,000 per year

(c) EEC must pay more than $2 million for the supplier

Answer 1

The assignment belongs to calculating net present value. The President of EEC mere called a meeting to declare that one of the organization's biggest suppliers of component parts has approached EEC regarding a possible purchase of the supplier. The President has requested that you and your staff examine the feasibility of getting this supplier. Based on the given information, compute net present value (NPV), internal rate of return (IRR) and payback for the investment opportunity: EEC anticipates saving $500,000 per annum for the subsequent 10 years by purchasing the supplier. EEC's cost of capital is 14%. EEC supposes it can purchase the supplier for $2 million. Answer the given: Q1. Based on your computations, must EEC obtain the supplier? Explain why or why not? Q2. Which of the methods (NPV, IRR and payback period) is the most helpful tool to employ Explain why? Q3. Which of the methods (NPV, IRR and payback period) is the least helpful tool to use? Explain why?