# Investment Analysis and Lockheed Tri Star

**Topics:**Net present value, Investment, Capital accumulation

**Pages:**2 (381 words)

**Published:**March 30, 2013

= -$35,000 + (4,500/0.12)

= $2,500

In this case, Rainbow should purchase the machine with this service contract as the NPV of this investment is positive. c) Instead of the service contract mentioned in b), Rainbow can reinvest 20% of the annual cost savings in new machine parts, resulting in the increase in cost saving at 4% annual rate. Additionally, as long as Rainbow reinvest at 20%, the cash flows will continue to grow at 4% in perpetuity. Table 1 Net annual cost savings calculations

DescriptionYear 0Year 1Year 2Year 3Year 4…..

Annual Cost Savings-35,000 5,000.00 5,200.00 5,408.00 5,624.32 ….. Reinvest 1,000.00 1,040.00 1,081.60 1,124.86 ….. Net Annual Cost Savings 4,000.00 4,160.00 4,326.40 4,499.46 …..

The calculations of the net cost savings in each year are shown in Table 1. NPV of this option can be calculated as follows. NPV = Initial cost + Present Value of All Cash Flows

= -$35,000 + [4,000/(0.12-0.04)]

= $15,000

Hence, Rainbow should reinvest 20% of the annual cost savings into...

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