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Calculate payback for the investment opportunity

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Reference no: EM132059254

Question: 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.

Reference no: EM132059254

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