1. Rainbow Products is considering the purchase of a paint-mixing machine in order to reduce labor costs. The savings are expected to provide the additional cash flows of $5,000 per year. The machine costs $35,000 and will last for 15 years. The cost of capital for this investment is 12% a) The payback period of this project is 7 years. The sum of cash flows during the first seven years equal the initial investment. The net present value (NPV) and IRR of this project is -$945.68, and 11.49% respectively. As the project has negative NPV and the IRR is lower than the cost of capital, Rainbow should not purchase the machine. b) If Rainbow pays additional $500 per year, Rainbow can get a service contract that keeps the machine in new condition forever. As a result, the net cash flows per year would be $4,500. The NPV of this project can be calculated as follows. NPV = Initial cost + Present Value of All Cash Flows

= -$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

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...

...InvestmentAnalysis and LockheedTriStar
The Case is divided into 5 different mini Cases. Each case is about another scenario.
Case 1 is about a company called Rainbow Products. The company considers the purchase of a paint-mixing machine. The machine costs $35.000 but the company expects an annual saving of $5.000 additional cash flow. The machine is expected to last 15 years and the cost of capital is 12 %.
First I...

...o
\
Course: Financial Decision Making
Date: 01/26/2012
InvestmentAnalysis and TriStarLockheed
1 (A) According to the information provided the pay back time shall be
35000/5000 = 7 years. Formula for net present value NPV is as follows (CALCULATING NET PRESENTVALUE, PAYBACK PERIOD, AND RETURN ON INVESTMENT):
15
NPV= -35,000 + ∑ 5,000 / (1 + 12%) ^ 15
i=1
=...

...InvestmentAnalysis and LockheedTriStar Problem Sets
February 25, 2013
1a. The results of NPV, payback and IRR calculations are the following. For payback method, Rainbow Product will pay back the original investment costs after 7 years. Net Present Value is -$946 and IRR is 11.49%. Rainbow Products should not purchase the machine according to the results of NPV and IRR calculation. The net present value...

...information. SMEDA does not assume any liability for any financial or other loss resulting from this memorandum in consequence of undertaking this activity. Therefore, the content of this memorandum should not be relied upon for making any decision, investment or otherwise. The prospective user of this memorandum is encouraged to carry out his/her own due diligence and gather any information he/she considers necessary for making an informed decision. The contents of the...

...Case study: InvestmentAnalysis and LockheedTriStar
MGMTS-2700
Professor Hamza Abdurezak
Harvard University
Yang Zhong
1> A. Payback, NPV, IRR, Should purchase or not?
Payback: $35,000/5000=7 year
NPV: =Co+ C1…..n/(1+i)^1….n
Co=-3,5000
CF1-CF15= 5,000; I= 12
Computing result is $-945.67
IRR: 11.49%
NPV is negative and...

...Harvard Business School
9-291-031
Rev. November 17, 1993
InvestmentAnalysis and LockheedTriStar
1. Rainbow Products is considering the purchase of a paint-mixing machine to reduce labor costs. The savings are expected to result in additional cash flows to Rainbow of $5,000 per year. The machine costs $35,000 and is expected to last for 15 years. Rainbow has determined that the cost of capital for such an...

...LockheedTriStar Case Study
Introduction
By 1966, Lockheed had already invested almost $900 million in research and development of the TriStar L-1011 (Scott, 2010). By 1971, with over $1 billion in sunk costs, Lockheed was seeking a $250 million federal guarantee through a congressional hearing in order to complete the program. Lockheed presented their case as a liquidity...

635 Words |
3 Pages

Share this Document

{"hostname":"studymode.com","essaysImgCdnUrl":"\/\/images-study.netdna-ssl.com\/pi\/","useDefaultThumbs":true,"defaultThumbImgs":["\/\/stm-study.netdna-ssl.com\/stm\/images\/placeholders\/default_paper_1.png","\/\/stm-study.netdna-ssl.com\/stm\/images\/placeholders\/default_paper_2.png","\/\/stm-study.netdna-ssl.com\/stm\/images\/placeholders\/default_paper_3.png","\/\/stm-study.netdna-ssl.com\/stm\/images\/placeholders\/default_paper_4.png","\/\/stm-study.netdna-ssl.com\/stm\/images\/placeholders\/default_paper_5.png"],"thumb_default_size":"160x220","thumb_ac_size":"80x110","isPayOrJoin":false,"essayUpload":false,"site_id":1,"autoComplete":false,"isPremiumCountry":false,"userCountryCode":"US","logPixelPath":"\/\/www.smhpix.com\/pixel.gif","tracking_url":"\/\/www.smhpix.com\/pixel.gif","cookies":{"unlimitedBanner":"off"},"essay":{"essayId":37433716,"categoryName":"Literature","categoryParentId":null,"currentPage":1,"format":"text","pageMeta":{"text":{"startPage":1,"endPage":2,"pageRange":"1-2","totalPages":2}},"access":"premium","title":"Investment Analysis and Lockheed Tri Star","additionalIds":[7,93,3,9,19],"additional":["Education","Education\/Greek System","Business \u0026 Economy","Entertainment","Natural Sciences"],"loadedPages":{"html":[],"text":[1,2]}},"user":null,"canonicalUrl":"http:\/\/www.studymode.com\/essays\/Investment-Analysis-And-Lockheed-Tri-Star-1551562.html","pagesPerLoad":50,"userType":"member_guest","ct":10,"ndocs":"1,500,000","pdocs":"6,000","cc":"10_PERCENT_1MO_AND_6MO","signUpUrl":"https:\/\/www.studymode.com\/signup\/","joinUrl":"https:\/\/www.studymode.com\/join","payPlanUrl":"\/checkout\/pay","upgradeUrl":"\/checkout\/upgrade","freeTrialUrl":"https:\/\/www.studymode.com\/signup\/?redirectUrl=https%3A%2F%2Fwww.studymode.com%2Fcheckout%2Fpay%2Ffree-trial\u0026bypassPaymentPage=1","showModal":"get-access","showModalUrl":"https:\/\/www.studymode.com\/signup\/?redirectUrl=https%3A%2F%2Fwww.studymode.com%2Fjoin","joinFreeUrl":"\/essays\/?newuser=1","siteId":1,"facebook":{"clientId":"306058689489023","version":"v2.8","language":"en_US"},"analytics":{"googleId":"UA-32718321-1"}}