Tristar Lockheed

2 Investment Analysis And Tri Star Lockheed

Yonsei University

Graduate School of Business

Corporate Finance

Harvard Business Case

Investment Analysis and Tri Star Lockheed

1.

(A)

The payback is 35,000/5,000= 7 years

Computation of the NPV :

                          15

NPV= -35,000 + Σ   5,000 /   ( 1 + 12%)^ 15

                          i=1

NPV       = $- 947. 67

Computation of the IRR :  

                                        15

0= -35,000 + Σ   5,000 /   ( 1 + IRR)^ 15

                          i=1

IRR= 11.49%

The NPV of   this project is negative and the IRR is lower then the Cost of Capital (12%)

Rainbow products shouldn’t go for it.

(B)

Based on the perpetuity formula we can compute the PV in this case :

Computation of the PV :

PV= Cash flow per year/ cost of capital)

        =4,500 / 0.12

        = $37,500

Computation of the NPV :

NPV= -Initial investment + PV

        = -35,000 + 37,500

NPV=$2,500

Rainbow products could buy this machine with the service contract if they intent to use it in the long-run.

(C)

Computation of the PV :

PV= C/ k-g

In this case C (end of year perpetuity payout) = 5,000-1,000= $4,000

k= 12%, discount rate

g=   4%, growing rate at perpetuity

PV= 4,000 / (0.12-0.04) = $50,000

Computation of the NPV :

NPV= -35,000+ 50,000 = $15,000

The rainbow products company should invest in this project because its NPV is largely positive because of the reinvestment of   20% of the annual cost, even though this is in a very long term vision.

2.

• Computation of the IRRs (with financial calculator) :

Project,

-Add a New Window :                 IRR = 34.61%

-Update Existing Equipment :     IRR = 18.01%

-Build a new stand :                     IRR = 31.20%

-Rent a larger stand:                     IRR = 1207%

All projects are acceptable because all the IRRs are higher than the discount rate(15%)

Looking at the internal rate o return of...