Eddison Electronic Company (EEC) provides electricity for several states in the United States. You have been employed as a cost accountant at this organization. The Operations department is thinking about making a capital investment this current year. Prepare a memo to the VP of Accounting at EEC that answers the questions below based on the following criteria:
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.
In your memo to the VP of Accounting, answer the following questions:
What are the advantageous and disadvantages to each investing method (NPV, IRR, or payback period)?
Which of the methods (NPV, IRR, or payback period) should EEC use, and 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?
Based on your calculations, should EEC acquire the supplier? Why or why not?