Investment Analysis & Lockheed Tri Star

Solutions
(A) Payback period is calculated by = Initial Investment/Cash
inflows
PB Period = $35000/$5000= 7years
NPV =- 35000+5000*{1-(1.12)^-15}/.12= $ - 945.677
IRR is rate at which NPV is zero. By trial and error method we
find IRR to be 11.5% approx.
(B) After incurring the maintenance cost of $ 500,net cash inflows
becomes $ 4500 in perpetuity.
PV of all future cash inflows = Cash flow/Discount rate
= 4500/.12=$ 37,500
The new contract “Good as new” is a good proposal. PV of cash
inflow is more than original investment of $ 35000 and Rainbow
products should go for this proposal.
(C) PV of perpetuity = $ 4000/ (.12-.04) =$ 50000
The PV of the perpetuity is more than the initial cash investment.
This is good proposal and company should take up the proposal.
(2) Calculation of NPV
Add a new window
= $44,000*{1-(1.15)^-3}/.15 - $75000 = 23461.90515
Update existing equipment
= - 50000 + $23000*{1- (1.15)^-3}/ .15 =2514.1775
Build a New Stand
= - 125000 +$70000*{1- (1.15)^-3}/ .15 = $34825.7582
Renting a larger stand
= -1000 + {12000/1.15 + 13000/(1.15)^2+14000/(1.15)^3}
=28469.87754
Calculation of IRR
Add a new window
IRR is approximately 35%.
Update existing equipment
IRR is approximately 18%.
Build a new stand
IRR is approximately 31.5%
Renting a larger stand
IRR is approximately 1200%
3)
(A) Using the original cash flows NPV stands at discount rate
of 25% is – $ 122101.1776.
We have to subsidize $122101.177
Either we could give it subsidy $122101 at the beginning at
year 1 thus bringing down the total cost to $ 877899 or we
could give the future value of $122101 for 4 years which
amounts to $ 298098 at end of year 4.
(B) Payback Period = 1000000/371739= 2.69 years
(C) Using original cash flows NPV at 20% is -37,666.4
In order to achieve NPV $75000 we have to provide subsidy
of $112666 ($75000 + $37666.4) at Year 1 or future value of
$112666 at Year 4 which is $233625.
(D)
(4) NPV= PV of cash inflows – PV of cash outflows
= $210000 - $100000
= 110000
The PV of this project is $ 110000.
Total Asset of company = Equity + Total cash inflows