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Investment Analysis and Lockheed Tristar

Investment Analysis and Lockheed Tristar

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Published by Rajesh Kumar

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Published by: Rajesh Kumar on May 25, 2012
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Investment Analysis and Lockheed Tristar

Rainbow Products
Part A
Cash Flow
-35000 5000 5000 5000 5000 5000 5000 5000 5000
Payback period 7 years
IRR 11.49%
NPV (Rs.945.68)
Decision NO WACC 12%
Part B
Cash Flow
Initial -35000
Yr 1 to infinity 4500
Payback period 7.78 years
IRR 12.86 %
NPV 2500 WACC 12%
Decision Yes
Part C
Cash Flow
-35000 4000 4160 4326.4 4499.456 4679.434 4866.612 5061.276 5263.727
Payback period 7.65 years
IRR 15.43 %
NPV 15000
Decision Yes
5000 5000 5000 5000 5000 5000 5000
5474.276 5693.247 5920.977 6157.816 till infinity
Investment Analysis and Lockheed Tristar
Inv. CF yr 1 CF yr 2 CF yr 3 IRR
Add a new window -75000 44000 44000 44000 34.6%
Update existing equipment -50000 23000 23000 23000 18.0%
Build a new stand -125000 70000 70000 70000 31.2%
Rent a larger stand -1000 12000 13000 14000 1207.6%
a) IRR rule is misleading due to difference in size of investment.
b) Using NPV rule, we recommend "Build a new stand".
c) The difference in ranking is explained by the size of investment.
NPV@15%
$25,462
$2,514
$34,826
$28,470
Investment Analysis and Lockheed Tristar
CF 0 CF1 CF 2 CF 3 CF 4
Cash flows w/o subsidy -1000000 371739 371739 371739 371739
A) IRR 25% -877899 371739 371739 371739 371739
Cost to city 122101
PV of Cost to city @20% 122,101
B) 2-year Payback -1000000 371739 628261 371739 371739
Cost to city 256522
PV of Cost to city @20% 178140
C) NPV 75000 @20% -887334 371739 371739 371739 371739
Cost to city 112666
PV of Cost to city @20% 112,666
D) ARR 40% -1000000 371739 371739 371739 684783
Cost to city 313044
PV of Cost to city @20% 150966
NPV subsidy option (C) is least costly to the city.
Investment Analysis and Lockheed Tristar
a) NPV of project = 210,000 - 110,000 = 100,000
Amount of new equity to be raised = 110,000
Suppose,
N = no. of new shares to be issued
P = final share price
N*P = 110,000
and (10,000+N)*P = 1210,000 = total value of assets after the project
So, (10,000+N)/N = 11
or, N = 1,000
P = $ 110
b) 1000 new shares to be issued @$110
c) The project increases the value of the stock of the existing shareholders by $10 (from $100 to $110)
Investment Analysis and Lockheed Tristar
a) Prodn. Level = 210 units = 35 units per year for 6 years
Prod. Cost = $14 mn per unit
Sale price = $16 mn per unit
Prodn
Year t Inv Costs Rev Cash Flow
1967 0 -100 -100
1968 1 -200 -200
1969 2 -200 -200
1970 3 -200 140 -60
1971 4 -200 -490 140 -550
1972 5 -490 560 70
1973 6 -490 560 70
1974 7 -490 560 70
1975 8 -490 560 70
1976 9 -490 420 -70
1977 10 -490 420 420
Total -900 -3430 3360 -480
Accounting profit -480
NPV @10% (Rs.584)
b) Prodn. Level = 300 units = 50 units per year for 6 years
Prod. Cost = $12.5 mn per unit
Sale price = $16 mn per unit
Prodn
Year t Inv Costs Rev Cash Flow
1967 0 -100 -100
1968 1 -200 -200
1969 2 -200 -200
1970 3 -200 200 0
1971 4 -200 -625 200 -625
1972 5 -625 800 175
1973 6 -625 800 175
1974 7 -625 800 175
1975 8 -625 800 175
1976 9 -625 600 -25
1977 10 600 600
Total -900 -3750 4800 150
Accounting profit 150
NPV @10% (Rs.274)
c) Prodn. Level = 400 units = 67 units per year for 5 years and 65 units in year 6
Prod. Cost = $11.75 mn per unit
Sale price = $16 mn per unit
Prodn
Year t Inv Costs Rev Cash Flow
1967 0 -100 -100
1968 1 -200 -200
1969 2 -200 -200
1970 3 -200 268 68
1971 4 -200 -787 268 -719.25
1972 5 -787 1072 284.75
1973 6 -787 1072 284.75
1974 7 -787 1072 284.75
1975 8 -787 1064 276.75
1976 9 -764 804 40.25
1977 10 780 780
Total -900 -4700 6400 800
Accounting profit 800
NPV @10% Rs.43
d) The decision to pursue the program was not sound. It affected the shareholder value adversely.
e) Prodn. Level = 210 units = 35 units per year for 6 years
Prod. Cost = $14 mn per unit
Sale price = $16 mn per unit
Govt. to bear the sunk cost of $700 mn till 1970.
Prodn
Year t Inv Costs Rev Cash Flow
1967 0
1968 1
1969 2
1970 3 140 140
1971 4 -200 -490 140 -550
1972 5 -490 560 70
1973 6 -490 560 70
1974 7 -490 560 70
1975 8 -490 560 70
1976 9 -490 420 -70
1977 10 -490 420 420
Total -200 -3430 3360 220
Accounting profit 220
NPV @10% Rs.16
11.74627

816 till infinity .977 6157.276 5693.247 5920.5000 5000 5000 5000 5000 5000 5000 5474.

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