Lockheed Hbr Case
Investment Analysis and Lockheed Tri Star
(Submission-1)
by
WMP 08009 Davinder Singh
WMP 08022 Manish Kumar Singh
WMP08035 Rahul Yadav
WMP08036 Rajesh Ganvir
A report submitted in fulfillment of the assignments for
Financial management
WMP 2015
Indian Institute of Management, Lucknow
Noida Campus
Date: 30.03.13
1. Rainbow Products | : | | | | | | | | Scenario 1 : Purchase of Paint- Mixing machine to reduce labor cost | | | | | | Expected Saving ($) | 5000 | per year | | Cost of machine ($) | 35000 | | | Depreciation in | 15 years | | | Rate @ cost of capital | 12% | | |
A: Objective: Compute payback, NPV and IRR to decide whether Rainbow Products should purchase the machine or not.
i) Bay back: cost of machine/expected saving per year = 35000/5000 = 7 years .
ii) NPV = Difference between the present value of cash inflows and the present value of cash outflows.
Thus,
NPV = -35000 + 5000* [1-(1/(1.12)^15]/.12 -35000 + 34053.31 NPV = -945.68
iii) IRR: It is that rate of interest that makes the sum of all cash flows zero. 0 = -35000 + 5000* [1-(1/(1+r)^15]/r IRR = 11.49%
Business Conclusion: Since NPV is -ve, Rainbow should not purchase the Machine.
B: Additional Info: Getting “Good as new” service for $500 per year, making the return on cash flows as $4500 per year in perpetuity. Cash Flow ($) 4500 per year in perpetuity Cost of machine ($) 35000 Depreciation in 15 years Rate @ cost of capital 12% Additional Investment ($) 500 i) Bay back: cost of machine/expected saving per year = 35000/4500 = 7.78 years .
ii) NPV = Difference between the present value of cash inflows and the present value of cash outflows.
Thus,
NPV = -35000 + 4500/.12 -35000 + 37500 NPV = 2500
iii) IRR: It is that rate of interest that makes the sum of all cash flows
(Submission-1)
by
WMP 08009 Davinder Singh
WMP 08022 Manish Kumar Singh
WMP08035 Rahul Yadav
WMP08036 Rajesh Ganvir
A report submitted in fulfillment of the assignments for
Financial management
WMP 2015
Indian Institute of Management, Lucknow
Noida Campus
Date: 30.03.13
1. Rainbow Products | : | | | | | | | | Scenario 1 : Purchase of Paint- Mixing machine to reduce labor cost | | | | | | Expected Saving ($) | 5000 | per year | | Cost of machine ($) | 35000 | | | Depreciation in | 15 years | | | Rate @ cost of capital | 12% | | |
A: Objective: Compute payback, NPV and IRR to decide whether Rainbow Products should purchase the machine or not.
i) Bay back: cost of machine/expected saving per year = 35000/5000 = 7 years .
ii) NPV = Difference between the present value of cash inflows and the present value of cash outflows.
Thus,
NPV = -35000 + 5000* [1-(1/(1.12)^15]/.12 -35000 + 34053.31 NPV = -945.68
iii) IRR: It is that rate of interest that makes the sum of all cash flows zero. 0 = -35000 + 5000* [1-(1/(1+r)^15]/r IRR = 11.49%
Business Conclusion: Since NPV is -ve, Rainbow should not purchase the Machine.
B: Additional Info: Getting “Good as new” service for $500 per year, making the return on cash flows as $4500 per year in perpetuity. Cash Flow ($) 4500 per year in perpetuity Cost of machine ($) 35000 Depreciation in 15 years Rate @ cost of capital 12% Additional Investment ($) 500 i) Bay back: cost of machine/expected saving per year = 35000/4500 = 7.78 years .
ii) NPV = Difference between the present value of cash inflows and the present value of cash outflows.
Thus,
NPV = -35000 + 4500/.12 -35000 + 37500 NPV = 2500
iii) IRR: It is that rate of interest that makes the sum of all cash flows