Investment Analysis and Lockheed Tristar

Rainbow Products
Part A
Cash Flow
-35000

5000

Payback period
IRR
NPV
Decision

5000

5000

5000

5000

5000

11.49%
(Rs.945.68)
NO

WACC

12%

WACC

12%

-35000
4500

Payback period
IRR
NPV
Decision

Payback period
IRR
NPV
Decision

5000

7 years

Part B
Cash Flow
Initial
Yr 1 to infinity

Part C
Cash Flow
-35000

5000

7.78 years
12.86 %
2500
Yes

4000

4160

4326.4 4499.456 4679.434 4866.612 5061.276 5263.727

7.65 years
15.43 %
15000
Yes

5000 5000 5000 5000 5000 5474.977 6157.816 till infinity 5000 5000 .247 5920.276 5693.

6% 18. c) The difference in ranking is explained by the size of investment. CF yr 3 44000 23000 70000 14000 IRR 34. we recommend "Build a new stand". b) Using NPV rule.Investment Analysis and Lockheed Tristar Add a new window Update existing equipment Build a new stand Rent a larger stand Inv. -75000 -50000 -125000 -1000 CF yr 1 44000 23000 70000 12000 CF yr 2 44000 23000 70000 13000 a) IRR rule is misleading due to difference in size of investment.0% 31.2% 1207.6% .

NPV@15% $25.470 .462 $2.514 $34.826 $28.

Investment Analysis and Lockheed Tristar Cash flows w/o subsidy A) IRR 25% Cost to city PV of Cost to city @20% B) 2-year Payback Cost to city PV of Cost to city @20% C) NPV 75000 @20% Cost to city PV of Cost to city @20% D) ARR 40% Cost to city PV of Cost to city @20% CF 0 -1000000 CF1 371739 CF 2 371739 CF 3 371739 CF 4 371739 -877899 371739 371739 371739 371739 371739 628261 371739 371739 122101 122.101 -1000000 256522 178140 -887334 371739 371739 371739 371739 371739 371739 371739 684783 112666 112.666 -1000000 313044 150966 NPV subsidy option (C) is least costly to the city. .

000 Suppose.Investment Analysis and Lockheed Tristar a) NPV of project = 210.000 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) .000 . N = no.000+N)*P = 1210.000 Amount of new equity to be raised = 110.000 (10. or. of new shares to be issued P = final share price and So. N*P = 110.110.000+N)/N = 11 N = 1.000 = total value of assets after the project (10.000 = 100.

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 . Level = 400 units = 67 units per year for 5 years and 65 units in year 6 Prod.584) Cash Flow 200 200 800 800 800 800 600 600 4800 -100 -200 -200 0 -625 175 175 175 175 -25 600 150 150 (Rs.274) c) Prodn.5 mn per unit Sale price = $16 mn per unit Prodn Year t Inv Costs Rev 1967 0 -100 1968 1 -200 1969 2 -200 1970 3 -200 1971 4 -200 -625 1972 5 -625 1973 6 -625 1974 7 -625 1975 8 -625 1976 9 -625 1977 10 Total -900 -3750 Accounting profit NPV @10% Cash Flow -100 -200 -200 -60 -550 70 70 70 70 -70 420 -480 140 140 560 560 560 560 420 420 3360 -480 (Rs. Level = 210 units = 35 units per year for 6 years Prod. Cost = $12.Investment Analysis and Lockheed Tristar a) Prodn. Cost = $14 mn per unit Sale price = $16 mn per unit Prodn Year t Inv Costs Rev 1967 0 -100 1968 1 -200 1969 2 -200 1970 3 -200 1971 4 -200 -490 1972 5 -490 1973 6 -490 1974 7 -490 1975 8 -490 1976 9 -490 1977 10 -490 Total -900 -3430 Accounting profit NPV @10% b) Prodn. Level = 300 units = 50 units per year for 6 years Prod. Cost = $11.

25 780 800 800 Rs.75 276.75 284. Cost = $14 mn per unit Sale price = $16 mn per unit Govt.16 140 -550 70 70 70 70 -70 420 220 .75 40.25 284. e) Prodn.75 284. to bear the sunk cost of $700 mn till 1970.43 d) The decision to pursue the program was not sound.1970 1971 1972 1973 1974 1975 1976 1977 3 4 5 6 7 8 9 10 Total -200 -200 -900 -787 -787 -787 -787 -787 -764 -4700 Accounting profit NPV @10% 268 268 1072 1072 1072 1064 804 780 6400 68 -719. Prodn Year t Inv Costs Rev 1967 0 1968 1 1969 2 1970 3 1971 4 -200 -490 1972 5 -490 1973 6 -490 1974 7 -490 1975 8 -490 1976 9 -490 1977 10 -490 Total -200 -3430 Accounting profit NPV @10% Cash Flow 140 140 560 560 560 560 420 420 3360 220 Rs. Level = 210 units = 35 units per year for 6 years Prod. It affected the shareholder value adversely.

74627 .11.

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