Course: Financial Decision Making
Investment Analysis and Tri Star Lockheed
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):
NPV= -35,000 + ∑ 5,000 / (1 + 12%) ^ 15
0= -35,000 + ∑ 5,000 / (1 + IRR) ^ 15
From the above calculation it can be projected that the net present value is negative and the IRR is also lover than the cost of capital which is 12% (B)
Present value = annual cash flow/ cost of capital
The net present value NPV = - initial investment + PV
This comes to = -5000+37500
Based on this it can be concluded that rainbow products can buy the machine for use in the long run as it is more economical (C)
In computing PV the formula is PV = C/ (K-g) where C is the annual payout = 5000-1000 =$ 4,000, k- discount rate = 12% and g- annual growth rate = 4% Hence PV= 4,000 / (0.12-0.04) = 50,000
And the NPV = -35000+50000 = 15000
=> From this calculation the project rainbow products company is commercially viable as the NPV is positive and this is due to the 20% of the annual cost that is reinvested. 2.
After calculating the IRR for the projects the following was the results. |Project |IRR | |Addition of a new window |36.4% | |Updating existing window |18.01% | |Building a new stand |31.20%...
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