Expert answer:Capital budgeting

Answer & Explanation:Capital Budgeting
Deliverable Length:  2
submissions: 1 Excel spreadsheet and 1 paper of 1,750–2,000 words
APA Format with references
Part 1
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 will you and your staff need to
analyze this investment opportunity?
· 
What will be your decision-making process?
Discuss and evaluate the different techniques that could be used in capital
budgeting decisions.
· 
Specifically, discuss how the time value of
money affects capital budgeting. Capital budgeting differs from regular
budgeting in that capital budgeting is for large investment decisions like
plant expansion. The regular budgeting is for your day-to-day operations
decisions.
· 
Which do you think EEC should use? Why?
Part 2
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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