Ford Case

Results and Analysis

Through net present value (NPV) calculations, break even breakdowns, and shareholder stock analysis based on a sales volume of 210 aircraft; this case study identifies flaws in the initial proposals presented by Lockheed in 1971.

In this case study, we will review the decision reached by our elected leaders based on the testimony given to their committee by Lockheed’s Chairman Haughton, that his company would reach a “break even” position after approximately 275 planes, and expected growing profits in future years based on their hopes to capture a 40% market share. We will examine whether the shareholders were well served, and with the luxury of time gone by, the accuracy of those sales projections.

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

Computation of the NPV:

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

                  NPV       = $- 947. 67

Computation of the IRR:  

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

                      IRR= 11.49%

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

Rainbow products shouldn’t go for it.

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.

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.

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• Computation...