TEAM 5
AYSEL NAZIROVA
BANU ALIZADA
KHAVAR GULIYEVA
KONUL AHMADOVA
SHAFIGA MAMMADZADA
SADRADDIN RZAYEV- CAPTAIN

1. RAINBOW PRODUCTS

A. Rainbow should not purchase this equipment by looking at NPV as the purchase criteria because it seems that although IRR may give the false impression of 14.15% return on investment, when those cash flows get discounted at the rate of cost of capital, the total payback comes to $34,054 which means we are actually paying $946 more today compared to sum of the benefits we will get through labor costs reduction for 15 years. Machine Savings per year | $5,000 | Machine cost | $35,000 | Machine lifetime (yrs) | 15 | Cost of Capital ( r ) | 12.00% | | | Payback period | 7.00 | Total Present Value | $34,054 | Net Present Value | ($946) | Internal rate of return | 14.15% | Payback period | 7.00 | Total Present Value | $34,054 | Net Present Value | ($946) | Internal rate of return | 14.15% |

B. Yes because with this new payment of $500 we will gain $2,500. Total savings ($4500 in perpetuity will be able to cover the total cost of the machine: which is initial investment ($35,000) + give us $2,500 extra return.

Cost of "Good as New" Additinoal Expenditure per year | $500 | | | | | Machine savings per year | $4,500 | Machine cost | $35,000.00 | Total Present Value | $37,500 | Net Present Value | $2,500 |

C. Actually this is even better than option B indeed this way the company will be able to save $15,000 compared to $2,500 in option B. Here we have to calculate how much we our growing savings is and deduct growing reinvesting and initial purchase cost ($35,000), and NPV comes around $15,000.

REINVESTING | SAVINGS GROWTH | 20% | 4% |

Growing Savings in perpetuity | $62,500 | Growing Reinvest in perpetuity | $12,500 | Total Present Value |