Year of Cash Flow A

ProType of Cash 0 1 2 3 1
A Investment (INR 10,000.00)
Revenue INR 21,000.00
Operating Expense (INR 11,000.00)
Depreciation (INR 10,000.00) 3
Pre-tax Inco (INR 10,000.00) INR 0.00 INR 0.00 INR 0.00
Net Income (INR 6,000.00) INR 0.00 INR 0.00 INR 0.00
Cash Flow (INR 10,000.00) INR 10,000.00 INR 0.00 INR 0.00
B Investment (INR 10,000.00)
Revenue INR 15,000.00 INR 17,000.00
Operating Expense (INR 5,833.00) (INR 7,833.00)
Depreciation (INR 5,000.00) (INR 5,000.00)
Pre-Tax Inco (INR 10,000.00) INR 4,167.00 INR 4,167.00 INR 0.00
Net Income (INR 6,000.00) INR 2,500.20 INR 2,500.20 INR 0.00
Cash Flow (INR 10,000.00) INR 7,500.20 INR 7,500.20 INR 0.00
C Investment (INR 10,000.00)
Revenue INR 10,000.00 INR 11,000.00 INR 30,000.00 B
Operating Expense (INR 5,555.00) (INR 4,889.00) (INR 15,555.00)
Depreciation (INR 3,333.33) (INR 3,333.33) (INR 3,333.33)
Pre-Tax Inco (INR 10,000.00) INR 1,111.67 INR 2,777.67 INR 11,111.67
Net Income (INR 6,000.00) INR 667.00 INR 1,666.60 INR 6,667.00
Cash Flow (INR 10,000.00) INR 4,000.33 INR 4,999.93 INR 10,000.33
D Investment (INR 10,000.00)
Revenue INR 30,000.00 INR 10,000.00 INR 5,000.00 C
Operating Expense (INR 15,555.00) (INR 5,555.00) (INR 2,222.00)
Depreciation (INR 3,333.33) (INR 3,333.33) (INR 3,333.33)
Pre-Tax Inco (INR 10,000.00) INR 11,111.67 INR 1,111.67 (INR 555.33)
Net Income (INR 6,000.00) INR 6,667.00 INR 667.00 (INR 333.20)
Cash Flow (INR 10,000.00) INR 10,000.33 INR 4,000.33 INR 3,000.13
Payback period A=1 year 2 Accounting return on investment
Rank High to Low: A or D, B, C B= 2 years A= $ -
C= 3 years B= $ 0.50
D= 1 year C= $ 0.60
A IRR = 0% D= $ 0.47
B IRR = 32% Rank High to Low: C,B,D,A
C IRR = 34% 4 NPV (10%) NPV (35%)
D IRR = 43% A $ (909.09) $ (2,592.59)
Rank High to Low: D,C,B,A B $ 3,016.88 $ (328.96)
C $ 5,282.24 $ (228.79)
D $ 4,651.32 $ 822.01

Rank High to Low (10%): C,D,B,A

Rank High to Low (35%): D,C,B,A

The rankings differ because the methods of measuring focus on different aspects of the project and also make different
assumptions for measuring the value of investments.

Payback period measures how quickly the cash flows can a project can recoup the orginal investments into a projec
The Accounting Return on Investments measures the average profit that can be expected from investments. It assu
The Internal Rate of Return measures the effective return rate such that NPV is zero. Assumes that money is reinves
The NPV measures the present value of benefits minus present value of costs. Assumes that money is reinvested.

If independent, choose B, C, and D because they all have positive NPV and their IRR are greater than the cost of cap
If mutually exclusive, choose D because it has the highest IRR and NPV if discount is 35%. It also has second highest
nd also make different

nvestments into a project. Assumes that returns from investment continues after payback period.
rom investments. It assumes that money is worth the same at any time - thereby ignoring the time value of money
mes that money is reinvested
money is reinvested.

ater than the cost of capital

also has second highest for other metrics.
ue of money
Timeline
Tax Rate 40%
Net Working Capital: 27%

A Year 0 Year 1
Sales (In Millions) 0.0000 10.0000
Cost of Sales 6.0000
SGA Expenses 2.3500
Introductory Expense 0.2000
Depreciation 0.1000
Income before tax 1.3500
After Tax Income 0.8100
Operating Cash Flow 0.0000 0.9100

Capital Expenditures (Equipment) -0.5000 0.0000

Working Capital 2.7000 3.5100
Net Change in Working Capital 2.7000 0.8100

Free Cash Flow -3.2000 0.1000

B NPV 0.90586
IRR 29.5453%

C Yes because the NPV is positive and the IRR is greater than the discount rate (20%)
 Year 2 Year 3 Year 4 Year 5
13.0000 13.0000 8.6667 4.3333
7.8000 7.8000 5.2000 2.6000
3.0550 3.0550 2.0367 1.0183
0.0000 0.0000 0.0000 0.0000
0.1000 0.1000 0.1000 0.1000
2.0450 2.0450 1.3300 0.6150
1.2270 1.2270 0.7980 0.3690
1.3270 1.3270 0.8980 0.4690

0.0000 0.0000 0.0000 0.0000

3.5100 2.3400 1.1700 0.0000
0.0000 -1.1700 -1.1700 -1.1700

1.3270 2.4970 2.0680 1.6390

scount rate (20%)

3
A Revenue Cost NPV
210000 110000 100000

B Old Equity Project Equity Total Equity

1000000 100000 1100000

Total Equity Old Shares New Price

1100000 10000 110

Project Cost New Price New Shares

110000 110 1000

C Old Shares New Shares Total Shares

10000 1000 11000

Old Shares Total Shares Total Inflow EquitOld Equity

10000 11000 1210000 1100000

New Shares Total Shares Total Inflow EquitNew Equity

1000 11000 1210000 110000

The total equity (or worth) of the

company increases by the NPV
amount (10000). Therefore, the price
of stock goes up by 10 to 110.
Therefore, people previously bought
the stock at 100 but now the stock is
worth 110 so they have an
unrealized gain of 10 dollars on each
stock
A Cash Flow model of 210 planes at 14 million cost per p
Year 1967 1968
t= 0 1
Cash Flow at delivery
Deposits
Total Revenues 0 0

Initial development cost -100 -200

Annual production cost
Total Costs -100 -200

Free Cash Flows -100 -200

NPV = ($584.05)

B Cash Flow model with 300 planes at a cost of 12.5 million

Year 1967 1968
t= 0 1
Cash Flow at delivery
Deposits
Total Revenues 0 0

Initial development cost -100 -200

Annual production cost
Total Costs -100 -200

Free Cash Flows -100 -200

NPV = ($311.64)
No, NPV is still negative.

C Cash Flow model for break-even point mill

Year 1967 1968
t= 0 1
Cash Flow at delivery
Deposits
Total Revenues 0 0

Initial development cost -100 -200

Annual production cost
Total Costs -100 -200
 Free Cash Flows -100 -200
NPV = $1.37
At 479 planes, we have a negative NPV. The NPV is positive at 480 planes.

No, it isnt as the Net Present Value of the Tri Star program was negative. They would need to sell 480 aircraft for
D the total free-world market of wide bodied over the next decade in order to not suffer any loss. If there is a g
required 480 aircrafts in the market. Hence, we can say that the adoption of the Tri Star program wi
s at 14 million cost per plane. Millions of dollars.
1969 1970 1971 1972 1973 1974 1975 1976 1977
2 3 4 5 6 7 8 9 10
420.00 420.00 420.00 420.00 420.00 420.00
140.00 140.00 140.00 140.00 140.00 140.00
0 140 140.00 560 560 560 560 420 420.00

-200 -200 -200

-490 -490 -490 -490 -490 -490
-200 -200 -690 -490 -490 -490 -490 -490 0

-200 -60 -550.00 70 70 70 70 -70 420.00

at a cost of 12.5 million per plane millions of dollars

1969 1970 1971 1972 1973 1974 1975 1976 1977
2 3 4 5 6 7 8 9 10
600.00 600.00 600.00 600.00 600.00 600.00
200.00 200.00 200.00 200.00 200.00 200.00
0 200 200.00 800 800 800 800 600 600.00

-200 -200 -200 -60

-625 -625 -625 -625 -625 -625
-200 -200 -825 -685 -625 -625 -625 -625 0

-200 0 -625.00 115 175 175 175 -25 600.00

or break-even point millions of dollars

1969 1970 1971 1972 1973 1974 1975 1976 1977
2 3 4 5 6 7 8 9 10
960.00 960.00 960.00 960.00 960.00 960.00
320.00 320.00 320.00 320.00 320.00 320.00
0 320 320.00 1280 1280 1280 1280 960 960.00

-200 -200 -200

-1000 -1000 -1000 -1000 -1000 -1000
-200 -200 -1200 -1000 -1000 -1000 -1000 -1000 0
 -200 120 -880.00 280 280 280 280 -40 960.00

d to sell 480 aircraft for no profit/loss. If there is a 10% annual growth in air travel, Lockheed needs to capture 62% of
r any loss. If there is a growth rate of 5%, the total world market would only be 323 aircraft, which is less than the
the Tri Star program will have a negative impact on shareholder value as there isnt a positive net income.
Assumptions
Total Planes = 210
Duration (years) = 6
Planes per year = 35
Cost per plane (millions) = 14
Annual production cost = 490
Revenue per plane (millions)= 16
Annual sales = 560
Cash flow for deposit = 140.00
Cash flow for sale year = 420.00
Years received early = 2
% deposits received= 25%
Pre-Tri Star = 9%
Discount rate = 10%

Assumptions
Total Planes = 300
Duration (years) = 6
Planes per year = 50
Cost per plane (millions) = 12.5
Annual production cost = 625
Revenue per plane (millions)= 16
Annual sales = 800
Cash flow for deposit = 200.00
Cash flow for sale year = 600.00
Years received early = 2
% deposits received= 25%
Pre-Tri Star = 9%
Discount rate = 10%

Assumptions
Total Planes = 480
Duration (years) = 6
Planes per year = 80
Cost per plane (millions) = 12.5
Annual production cost = 1000
Revenue per plane (millions)= 16
Annual sales = 1280
Cash flow for deposit = 320.00
Cash flow for sale year = 960.00
 Years received early = 2
% deposits received= 25%
Pre-Tri Star = 9%
Discount rate = 10%

ds to capture 62% of
h is less than the
income.