What will be your decision-making process

Assignment Help Accounting Basics
Reference no: EM131569979

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.

Reference no: EM131569979

Questions Cloud

Cash flow model includes dividends paid to owners : Which of the following best describes how lenders tend to look at loan repayment? Which component of the UCA cash flow model includes dividends paid to owners?
Describe the statement of work : The SOW is a "narrative description of the work required for the project." If you work for an organization that bids on a project
Draw a configuration of four houses and two utilities : Let n be any positive integer. Motivated by 2(a), suggest a general result concerning n houses and 2 utilities. Draw a graph supporting your answer.
Problem related to the isomorphic graph : Prove that two graphs which are isomorphic must contain the same number of triangles.
What will be your decision-making process : What will be your decision-making process? Discuss and evaluate the different techniques that could be used in capital budgeting decisions
What is the sum total of cash from operating activities : In a statement of cash flows, what is the sum total of cash from operating activities, cash from investing activities,
What art movement most interested you and why : Explain the connections you see between your selected style and art of the present day, or explain why they are too varied to be connected.
Calculate service-related variance still unexplained : Determine the service-related revenues and calculate service-related variance still unexplained. Determine total variance between the planned and actual budgets
How about ethernet-sata-firewire-usb and media cards : Everybody needs ports, right? I just described an important one - HDMI. How about Ethernet, SATA, FireWire, USB (2.0 or 3.0), media cards?

Reviews

Write a Review

Accounting Basics Questions & Answers

  How much control does fed have over this longer real rate

Hubbard argues that the Fed can control the Fed funds rate, but the interest rate that is important for the economy is a longer-term real rate of interest.   How much control does the Fed have over this longer real rate?

  Coures:- fundamental accounting principles

Coures:- Fundamental Accounting Principles: - Explain the goals and uses of special journals.

  Accounting problems

Accounting problems,  Draw a detailed timeline incorporating the dividends, calculate    the exact Payback Period  b)   the discounted Payback Period. the IRR,  the NPV, the Profitability Index.

  Write a report on internal controls

Write a report on Internal Controls

  Prepare the bank reconciliation for company

Prepare the bank reconciliation for company.

  Cost-benefit analysis

Create a cost-benefit analysis to evaluate the project

  Theory of interest

Theory of Interest: NPV, IRR, Nominal and Real, Amortization, Sinking Fund, TWRR, DWRR

  Liquidity and profitability

Distinguish between liquidity and profitability.

  What is the expected risk premium on the portfolio

Your Corp, Inc. has a corporate tax rate of 35%. Please calculate their after tax cost of debt expressed as a percentage. Your Corp, Inc. has several outstanding bond issues all of which require semiannual interest payments.

  Simple interest and compound interest

Simple Interest, Compound interest, discount rate, force of interest, AV, PV

  Capm and venture capital

CAPM and Venture Capital

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd