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Investment Analysis and Lockheed Tri Star

This case consists of four capital budgeting problems and a mini-case. Unlike the other cases, you do not need to write a two-page memorandum. Instead, simply complete the questions below.

A. Problem 1: Rainbow Products

Compute payback, IRR, and NPV for each of the three alternatives. Summarize your results in a table. Write a single paragraph explaining which option they should choose and why.

B. Problem 2: Hot Dog Stand

Compute the IRR and NPV for each of the five alternatives. Summarize your results in a table and draw a NPV profile showing all five alternatives as a single graph. Write a single paragraph recommending a strategy for the hot dog stand.

[Problems 3 & 4: Ignore these problems.]

Lockheed Tri Star Mini Case

Assume you are at the beginning of 1967:

a) At planned production of 210 units, what is the value of the Tri Star project?

b) At planned production of 300 units, what is the value of the Tri Star project?

c) At what level of sales volume would the Tri Star project reach true economic breakeven?

Now assume you are at the end of 1970. You, and Lockheed, realize that it was mistake to have undertaken the Tri Star project. However, $700 million has already been spent and we need to decide whether to continue with the project or abandon it at this stage. Write a brief memorandum (maximum of 1 page) to management providing a firm recommendation. Be sure to provide some justification for your recommendation.