Rainow Products

Paint Mixing machine

Savings
Life
Cost of Capital

$35, 000
$5000
15 Years
12%
Possibility [A]
Payback
Discounted
Cashflows

0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15

-35000
5000
5000
5000
5000
5000
5000
5000
5000
5000
5000
5000
5000
5000
5000
5000

-35000
Rs. 4,464.29
Rs. 3,985.97
Rs. 3,558.90
Rs. 3,177.59
Rs. 2,837.13
Rs. 2,533.16
Rs. 2,261.75
Rs. 2,019.42
Rs. 1,803.05
Rs. 1,609.87
Rs. 1,437.38
Rs. 1,283.38
Rs. 1,145.87
Rs. 1,023.10
Rs. 913.48

=Investments cashinflow
-35000
-30000
-25000
-20000
-15000
-10000
-5000
0
IE PP=7years

Possibility [B]
Initial Outflow
Every year outflow
Net cash flow
Usage Life

-35000
-500
4500
Perpetuity

Thus the Present value of the project would be

Cashflow/cost of capital
37500

NPV

Initial Outflow
PV37500 Rs. -35,000.00
2,500.00

If Rainbow Products considers to use the machine for along time the option of
Service Contract is worth considering

Possibility [A]

hflow/cost of capital

Discounted Payback

NPV

IRR

=Investments - Discounted
Cashflows
-35000
Rs. -30,535.71
Rs. -26,549.74
Rs. -22,990.84
Rs. -19,813.25
Rs. -16,976.12
Rs. -14,442.96
Rs. -12,181.22
Rs. -10,161.80
Rs. -8,358.75
Rs. -6,748.88
Rs. -5,311.50
Rs. -4,028.13
Rs. -2,882.26
Rs. -1,859.16
Rs. -945.68

Outflow

npv=0
-35000

Inflow
Rs. -34,054.32
Rs. -945.68

Possibility [C]
Initial Outflow
Every year outflow
Net cash flow
Usage Life

-35000
20% of inflow
4000 for first year
with growth of 4% every year
Perpetuity

Thus the Present value of the project would be

Initial Perpetuity payout/ (Disc. Rate - growth rate)
Rs. 4,000.00
8.00%

11.49%

NPV

50000
50000
15000

-35000

Of all the 3 posibilities this sounds to be the bestest considering

th business has a long life.

Cost of Capital / Discount Rate

Project
Add a new window
Update Existing Equipment
Build a new stand
Rent a larger stand
Add a new window and update equipment

15%
Incremental Cash Flows
InvestmentCash Inflow
T0
Year 1
Year 2
Year 3
-75000
44000
44000
44000
-50000
23000
23000
23000
-125000
70000
70000
70000
-1000
12000
13000
14000
-125000
67000
67000
67000

Using IRR the proposal going ahead with worth is renting a larger stand
Cosidering NPV the best project would be to build a new stand.
All the options are worth going ahead with as the IRR for all projects is >15%

IRR
35%
18%
31%
1208%
28%

PV
$100,461.91
$52,514.18
$159,825.76
$29,469.88
$152,976.08

NPV
$25,461.91
$2,514.18
$34,825.76
$28,469.88
$27,976.08

MBATech
Year 1 StartT0
Year 1
T1
Year 2
T2
Year 3
T3
Year 4
T4

1 IRR

-500000
371739
371739
371739
371739

-877870
371739
371739
371739
371739

64%

25.00%

2 PayBack

743478

3 npv

($962,333.60) $462,333.60

4 ARR

40
AACF=

371739
-250000

-125000

75000

377870
243478

NPV

PV of Inflows
Investment
210000
110000
100000