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EEG Inc: NPV, Payback Period, and Internal Rate of Return

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EEG, Inc (Entrepreneurial Entertainment Group) is a recording studio that was formed by five friends shortly after high school in 1996 in Biloxi, Mississippi. The five friends have always had a love of pop and hip-hop music and decided to become recorders/producers as they all had a flair for different elements of the business-side of the industry. Currently they have multiple musical prodigies contracted with them. Several large national entertainers have also signed with them over the years.

The close-knit atmosphere and ground floor development of all albums and promotional tours have kept the more affluent entertainers happy to be involved with a less 'formal' production company that isn't operating out of the traditional larger cities. All recording and production services are performed in their studios in Biloxi where their corporate offices are located as well. This year their annual financial statements showed $4,600,000 in net income on $22,965,000 in revenues.

Their primary recording equipment, is about ten years old and the team is considering adding additional equipment that will integrate directly into newer computers (both PC and Mac.) The newer integration will be able to facilitate newer recording styles, newer formats, and better overall recording quality than what they've seen before. It could also be used as a replacement for the older equipment should it become disabled, since the new sound boards, microphones, etc. can â??mimicâ? the old-school sound quality almost perfectly.

Dexter, the more technically savvy of the five friends has narrowed the purchase down to two vendors with the following information. Both would be financed directly through the vendor:

SoundPro 9800
Manufacturer: Charter Industries
Features: 24 channel recording device and accessories (cables, microphones, wireless units, etc.) Full integration into most recent PC or Mac computers. Direct integration to online music services for immediate product distribution. 3-year manufacturer's warranty-4 year extended warranty option. No charge installation or training.
Initial Cost: $3,280,000
Financing Terms: 7 years at an annual interest rate of 6%
Expected annual net cash flows from purchase: $630,000

AudioExcellence Model 12-K
Manufacturer: Audio Excellence, Inc.
Features: 20 channel recording device and accessories (cables, microphones, wireless units, etc.) Full integration into most recent PC or Mac computers with optional software. Direct integration to online music services for immediate product distribution. 5-year manufacturer's warranty-no extended warranty available. No charge installation or training.
Initial Cost: $2,990,000
Financing Terms: 5 years at an annual interest rate of 7%
Expected annual net cash flows from purchase $625,000

Given the financial information provided on the two options Dexter has presented, what would be the NPV, Payback Period, and Internal Rate of Return on both options? Which one is the best option? Why or why not? Be specific.

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NPV, payback period and internal rate of return for EEG, Inc are examined.

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