Lockheed Tri Star

Pages: 5 (685 words) Published: December 4, 2012
CASE 7: INVESTMENT ANALYSIS AND LOCKHEED TRI STAR
INVESTMENT ANALYSIS QUESTION 1:
A) Payback, NPV, IRR: (35,000) 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000

1 (35,000)

2

3

4

5

6

7

8

5,000

5,000

5,000

5,000

5,000

5,000

5,000

9 Machine Cost Duration (years) Cash Flows Cost of capital Payback (years) 35000 15 5000 12% total cost annual cash flow

10

11

12

13

14

15

7

NPV IRR

present value of cash inflows - present value of cash outflows 3.07%

(\$9,073.04)

B) Should Rainbow Products purchase the machine with service contract? perpetuity annual receipt discount rate 4500 0.12 37,500

\$37,500 - \$35,000 = \$2,500 Based on the perpetuity, Rainbow Products should purchase the machine with the service contract.

C)

�� =

�� �� − ��
V= 4,000 .12 - .04 4,000 0.08

\$4,000 cash flow 12% cost of capital 4% growth rate 50,000

50,000 - 35,000 = 15,000 Rainbow Products should reinvest into new machine parts each year; by doing so, Rainbow Products will have a net present value of \$15,000.

INVESTMENT ANALYSIS QUESTION 2:
Incremental Cash Flows Investment Year 1 Year 2 Year 3 (\$75,000) 44,000 44,000 44,000

IRR 35%

NPV 22,140.79

Update Existing Equipment Build a New Stand Rent a Larger Stand Discount Rate 15%

-50,000 -125,000 -1,000

23,000 70,000 12,000

23,000 70,000 13,000

23,000 70,000 14,000

18% 31% 1208%

2,186.24 30,283.27 24,756.42

* Using the IRR, the proposal to recommend would be to rent a larger stand. * Using the NPV, the proposal to recommend would be to build a new stand. The IRR and NPV differ in that NPV takes into consideration the discount rate whereas the IRR does not. The best option would be to use NPV.

INVESTMENT ANALYSIS QUESTION 3:
Year 0 -1,000,000 A) IRR to 25%: Year 0 -876,607 City spends Year 1 371,739 -123,393 Year 2 371,739 Year 3 371,739 Year 4 371,739 IRR 25% Year 1 371,739 Year 2 371,739 Year 3 371,739 Year 4 371,739 IRR 18%

In order to get an internal rate of return of 25%, the project will have to be subsidized to \$876,607.

B) 2 year payback: Year 0 -743,478 City spends Year 1 371,739 -256,522 Year 2 371,739 Year 3 371,739 Year 4 371,739 Payback 2.7 New Payback 2.0

In order to get a payback of 2 years, the project will have to be subsidized to \$743,478.

C) NPV \$75,000 when cash flows discounted at 20%: Year 0 Year 1 Year 2 -1,052,334 371,739 371,739 City spends 52,334

Year 3 371,739

Year 4 Discount Rate (\$31,388.67) 371,739 20%

New NPV

(\$75,000.00)

In order to get a net present value of \$75,000, the project will have to be subsidized to \$1,052,334.

INVESTMENT ANALYSIS QUESTION 3 (Cont.):
D) ARR of 40%: Year 0 -826,102 City spends Year 1 371,739 -173,898 Year 2 371,739 Year 3 371,739 Year 4 371,739 ARR 0.24 New ARR 0.40

������ =

�������������� ������������ ������ℎ �������� − �������������������� ÷ 2 ������ = 371,739 − 1,000,000 4 1,000,000 2 165,214 413,051

�������������������� # ���� ����������

0.40

In order to get a 40% ARR, the project will have to be subsidized to \$826,102. The plan to recommend would be Plan C since the city would not be spending any money.

INVESTMENT ANALYSIS QUESTION 4:
VAI Market Value Balance Sheet \$1,000,000 Equity \$1,000,000 \$210,000 \$110,000 10,000 \$100

Assets

Present Value Initial Costs # of shares Price per Share

NPV Capital Needed Shares to be issued at current price

outflowsinflows \$110,000

\$100,000

1100

There is no effect on the value of stock.