FOR EXCEPTIONAL PROFF ONLY

 Unit 3 DB

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 analyze the feasibility of acquiring this supplier. Discuss the following: (

• What information is needed to analyze this investment opportunity?
• What will be your decision-making process?
• All future costs are relevant in decision making. Do you agree? Why?
• Capital budgeting decisions fall into 2 broad categories: screening decisions and preference decisions. Discuss this.
• Which do you think EEC should use—screening decisions or preference decisions? Why?

Unit 3 IP

Based on the following information, calculate net present value (NPV), internal rate of return (IRR), and payback for the investment opportunity: (750-1,000 words) 

• 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: (1,500–2,000 words) 

• 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.