CTUO Capital Budgeting Discussion

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?