Lockheed Tri Star

In: Business and Management

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CASE 7: INVESTMENT ANALYSIS AND LOCKHEED TRI STAR
INVESTMENT ANALYSIS QUESTION 1:
A) Payback, NPV, IRR: (35,000) 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000

1 (35,000)

2

3

4

5

6

7

8

5,000

5,000

5,000

5,000

5,000

5,000

5,000

9 Machine Cost Duration (years) Cash Flows Cost of capital Payback (years) 35000 15 5000 12% total cost annual cash flow

10

11

12

13

14

15

7

NPV IRR

present value of cash inflows - present value of cash outflows 3.07%

($9,073.04)

B) Should Rainbow Products purchase the machine with service contract? perpetuity annual receipt discount rate 4500 0.12 37,500

$37,500 - $35,000 = $2,500 Based on the perpetuity, Rainbow Products should purchase the machine with the service contract.

C)

�� =

�� �� − ��
V= 4,000 .12 - .04 4,000 0.08

$4,000 cash flow 12% cost of capital 4% growth rate 50,000

50,000 - 35,000 = 15,000 Rainbow Products should reinvest into new machine parts each year; by doing so, Rainbow Products will have a net present value of $15,000.

INVESTMENT ANALYSIS QUESTION 2:
Incremental Cash Flows Investment Year 1 Year 2 Year 3 ($75,000) 44,000 44,000 44,000

Project Add a New Window

IRR 35%

NPV 22,140.79

Update Existing Equipment Build a New Stand Rent a Larger Stand Discount Rate 15%

-50,000 -125,000 -1,000

23,000 70,000 12,000

23,000 70,000 13,000

23,000 70,000 14,000

18% 31% 1208%

2,186.24 30,283.27 24,756.42

* Using the IRR, the proposal to recommend would be to rent a larger stand. * Using the NPV, the proposal to recommend would be to build a new stand. The IRR and NPV differ in that NPV takes into consideration the discount rate whereas the IRR does not. The best option would be to use NPV.

INVESTMENT ANALYSIS QUESTION 3:
Year 0 -1,000,000 A) IRR to 25%: Year 0 -876,607 City spends Year 1…...

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