Investment Analysis and Lockheed Project

Case 1: Rainbow Projects Investment

Rainbow Products' investment is guided by the potential return of the project and its

recovery of the investment capital. Internal rate of return and net present value are critical to

revealing the possible amount of return for the project. The project's net present value identifies

the importance of expected cash flows from the project. On the other hand, the internal rate of

return reveals the rate of return of the projected cash flows produced by the investment.

A summary of the expected cash flows, net cash flows, cost of capital, growth rate,

payback period, net present period, and internal rate of return for different scenarios are

presented in the table below.

Item/Scenario A B C
Investment $35000 $35000 $35000
Constant Inflows (15 years)/Net Cash flow $ 5000 $4500 $4000
Cost of Capital 12% 12% 12%
Growth rate 0 0 4%
Payback Period 7 7.78 8.75
Net Present Value -$945.68 $2500 $15000
Internal Rate of Return 11.49% - -

The payback period for scenario A is seven years, nearly half of the period of the

investment period, while the Net present value is -$945.68, which shows a poor feasibility

project investment. The internal rate for $5000 on the investment project is 11.49%, slightly

below the cost of capital (12%). Since the present value is negative, there is no viability for

investing in the paint mixing machine. This proposition is supported by the internal rate of

return, which shows that the project will not accrue any profits for the given period (11.49%-
12%), net return = -0.51%. Overall, the results show the least feasibility and that the project takes

longer to accrue profits. As a consequence, Rainbow Products should reject the proposal.

When the project is restructured to spend an additional $500 annually, the net cash flows

for each year change to $4500. The net present value increases to a positive figure, $2500. This

shows potential profits, and thus the project is feasibly adoptable. If further modifications are

made that 20% of cost savings are redirected to the machine and cost savings increase by 4%

such that net cash flows for years 1 and 2 are $4000 and G$4160 accordingly, then the net

present values become bigger $15000. The last scenario is preferable to the others for relatively

higher profitability.

Case 2: Concession Project

The table below shows a summary of cash inflows with a corresponding internal rate of

return and the net present value of investment choices.

Incremental Cash Flows

Project Investmen Year 1 Year 2 Year 3 IRR NPV
t
Add a New Window -$75,000 44,000 44,000 44,000 35% 25,461.91
Update Existing Equipment -50,000 23,000 23,000 23,000 18% 2,514.18
Build a New Stand -125,000 70,000 70,000 70,000 31% 34,825.76
Rent a Larger Stand -1,000 12,000 13,000 14,000 1208% 28,469.88

Considering the internal rate for the projected cash flows renting a larger stand shows

exceptional financial feasibility. Adding a new window seems profitable and can be

recommended because it has an internal rate of return of 35%. However, the IRR for renting a

larger stand should be corrected for long-term benefits such as owning the asset. When

considering the net present value for the project options, Building a new stand is expected to

have the highest value at $34825.76, followed by renting a larger stand with a net value of
$28469.88. When using the NPV approach, the choices change compared to when IRR

technique.

It is critical to note that the NPV identifies the current value of money that a project

would yield for a given period. On the contrary, the IRR tells the rate of return for the projected

cash flows of a project. Therefore, the IRR does not identify the current time value of money for

the project. The IRR magnifies small projects and makes them look lucrative overlooking that

larger projects may have significant cash flows leading to higher profitability. This provides the

contrasting order of the above projects because the NPV approach accounts for the size of

investments and subsequent cash flows. Thus, the NPV approach is better and appropriate for

different-sized projects. The IRR can be applied when projects are equal but have different cash

flows.

Case 3: MBA Tech Incorporation

The table below presents summary cash flows and investment behavior for an MBA Tech

Inc. $1000000 project (values in italics were obtained from Excel results).

Investment $1000000.00
Constant Cash Flows for four years $371739.00
Subsidy for IRR =25% $120000.00
Subsidy for a 2-year payback $256522.00
Subsidy for NPV $75000 $112666.40
Subsidy for ARR =40% $174000.00
The results indicate that the government will require a relatively more significant subsidy

to ensure that the payback period of the project is two years. The least subsidy will be spent on

ensuring the net present value of the project is $75000. The internal rate of return of a project for

significant investments appears lower than its subsequent cash flows and thus is likely to

underestimate the real current monetary value of the project. An IRR of 25% annual subsidy of
$30000 would apply, while a $128261 annual subsidy would render the project a 2-year project

rather than the current five-year payback. A $28166 yearly subsidy would be required for the

project to have an NPV of $75000, but if we need a 40% annual rate of return, we would require

a $43500 annual subsidy. I would recommend the two-year subsidy to ensure the project

payback is two years rather than the original five-year period. However, the subsidy size is very

large relative to the other four years, even spread subsidies.

Case 4: Value Added Industries (VAI)

The table below presents a summary of the effects of new investment on the equity and

shareholders

Shares 10000
Equity $
1,000,000.00
Asset $
1,000,000.00
PV Inflows $
210,000.00
PV outflow $
110,000.00
NPV CF $
100,000.00
New Price of Stock 110
New Stock Issued 1000
NPV of New Project/Share 10
Effect of New Project On Existing 10%
shareholders
Cost of New Project/New Share 1000

The project's net present value is $100,000.00, obtained from the difference between cash

inflows and outflows. A 1000 common stock worth each at $110 should be issued worth

$110000. This leads to a 10% additional value to the shareholder value. The increase in NPV

increases the existing shareholder value (stock). Thus the new shareholders will be paying $110

per share compared to the existing ones who paid $100 per share. The company should not sell
the shares at any price below $100 per share because that would mean that new shareholders will

acquire more ($110) by paying less (<$100).

VAI New Balance Sheet

Assets $ 1,000,000.00 Equity ($10000 @100) $
1,000,000.00
New Equity ($1000 @110) $
110,000.00
New Projected $ 210,000.00 Created Market Value $
CF ($10000@10) 100,000.00
Totals $ 1,210,000.00 Total $
1,210,000.00

Lockheed Tri Star

Q1: True value of 210 units

Given the cash outflows for the preproduction period for the first four years (1997 to

1971), the average production cost for 6 six years (1971 to 1976) $490 *6, and revenue inflows

for six years each $420 m, we determine the cash flows of the project, the IRR, and NPV. The

resultant cash flows lead to a net value of –$584.05 and an internal rate of return of 9.09%. This

value does not show financial feasibility for production because it shows losses.

Q2: Breakeven at roughly 300 units?

Changing the production units to near 300 does not show a practical breakeven point

because the net present value is still negative -$274.38. Lockheed needs to produce more units to

break-evening the initial costs. The internal rate of return is very low, 2.38%, which does not

meet the regular cost of capital of 10%.

 Q3 Accounting and Economic Breakeven

At 310 units, Lockheed appears to have a breakeven NPV = $23.98. The internal rate of

return is slightly above ten and may equal the cost of capital, so at 310 units, the firm does not

enjoy economic profits. We find the economic breakeven for the company.

The economic profit occurs when the constant revenue is $1333.33, and the company

produces 330 units. The cash flows for the fifth to 10th year are positive in this production

schedule. The project's net present value is $2179.99 with a 45.71% internal rate of return.

Compared to the accounting breakeven point, the IRR has increased significantly by more than

fourfold, improving the profitability of the project.

 Q4: Feasibility of pursuing the Tri Star Program

The project does not show financial feasibility because the NPV of the 10% discount rate

was negative. A low internal rate return accompanies the project disapproving the project

viability. When the project was adopted, the shareholder stock process reduced from $71 to $3,

reducing the overall shareholder stock worth. Thus the outstanding shares worth $11.3 million

were adversely affected by adopting the project.