# Investment Analysis

Topics: Net present value, Cash flow, 1967 Pages: 14 (2657 words) Published: September 24, 2011
(A)
The payback is 35,000/5,000= 7 years

Computation of the NPV :

15
NPV= -35,000 + Σ 5,000 / ( 1 + 12%)^ 15
i=1

NPV = \$- 947. 67

Computation of the IRR :

15
0= -35,000 + Σ 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 :
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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%)

1.

(A)
The payback is 35,000/5,000= 7 years

Computation of the NPV :

15
NPV= -35,000 + ÐžÐˆ 5,000 / ( 1 + 12%)^ 15
i=1

NPV = \$- 947. 67

Computation of the IRR :

15
0= -35,000 + ÐžÐˆ 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 shouldnÐ²Ð‚â„¢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.

Ð²Ð‚Ñž 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.

Ð²Ð‚Ñž 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 a larger stand: NPV = \$ 28,469.87

All the projects are acceptable because all the NPVs are positive Looking at the net present value of each project, build a new stand Is the project with the highest NPV Ð²Ð‚Ñž The...