Investment Analysis and Tri Star Lockheed
By: Wendy • Essay • 2,375 Words • March 4, 2010 • 4,159 Views
Join now to read essay Investment Analysis and Tri Star Lockheed
Yonsei University
Graduate School of Business
Corporate Finance
Harvard Business Case
Investment Analysis and Tri Star Lockheed
1.
(A)
The payback is 35,000/5,000= 7 years
Computation of the NPV :
15
NPV= -35,000 + ОЈ 5,000 / ( 1 + 12%)^ 15
i=1
NPV = $- 947. 67
Computation of the IRR :
15
0= -35,000 + ОЈ 5,000 / ( 1 + IRR)^ 15
i=1
IRR= 11.49%
The NPV of this project is negative and the IRR is lower then the Cost of Capital (12%)
Rainbow products shouldn’t go for it.
(B)
Based on the perpetuity formula we can compute the PV in this case :
Computation of the PV :
PV= Cash flow per year/ cost of capital)
=4,500 / 0.12
= $37,500
Computation of the NPV :
NPV= -Initial investment + PV
= -35,000 + 37,500
NPV=$2,500
Rainbow products could buy this machine with the service contract if they intent to use it in the long-run.
(C)
Computation of the PV :
PV= C/ k-g
In this case C (end of year perpetuity payout) = 5,000-1,000= $4,000
k= 12%, discount rate
g= 4%, growing rate at perpetuity
PV= 4,000 / (0.12-0.04) = $50,000
Computation of the NPV :
NPV= -35,000+ 50,000 = $15,000
The rainbow products company should invest in this project because its NPV is largely positive because of the reinvestment of 20% of the annual cost, even though this is in a very long term vision.
2.
• Computation of the IRRs (with financial calculator) :
Project,
-Add a New Window : IRR = 34.61%
-Update Existing Equipment : IRR = 18.01%
-Build a new stand : IRR = 31.20%
-Rent a larger stand: IRR = 1207%
All projects are acceptable because all the IRRs are higher than the discount rate(15%)
Looking at the internal rate o return of each project, rent a larger stand
Is the project with the highest IRR.
• Computation of the NPVs (with financial calculator) :
Project,
-Add a New Window : NPV = $ 25,461.9
-Update Existing Equipment : NPV = $ 2,514.18
-Build a new stand : NPV = $ 34,825.75
-Rent