# decision making and capital budgeting calculations memo

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Decision Making and Capital Budgeting (IP)

Deliverable Length: 1 Excel spreadsheet and 1 paper of 1,500â€“2,000 words

Assignment Description:

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.
• EECâ€™s cost of capital is 14%.
• EEC believes it can purchase the supplier for \$2 million.

• 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 EECâ€™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:

• EECâ€™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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