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Lockheed Case

In: Business and Management

Submitted By bgdev12
Words 714
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1. a) Payback Period= Investment/Cash Flow per Year = 35,000/5000 = 7 year
Computation of NPV:
NPV= C0 + PV [PV= C0 + Σi=1t Ct/(1+r)t]
=C0 +C[1/r – 1/r(1+r)t]
= -35,000+ 5000[1/.12 - 1/.12(1+.12)15]
= -35,000 + 5000[1/.12 – 1/.657]
= -35,000 + (5000 * 6.81) = -945.68
i.e. $ -945.68
Computation of IRR:
0= -35,000 + Σ t i=1 5000/(1+IRR)t
= 11.49%
Rainbow Products should not purchase the machine because it is not profitable whether you utilize the NPV method or the IRR method. By NPV method, project should be rejected because it has a negative NPV of $945.68. By IRR method, the project should be rejected because the IRR is less than cost of capital for the investment.

1.b) The Perpetuity formula to calculate PV = Cash Flow per Year/Cost of Capital
PV=C/r
= 4500/.12 = $ 37,500.
NPV= PV – Initial investment = 37,500 – 35,000 = $ 2500
Rainbow Products should purchase this machine with the service contract because it will produce a cash flow of $ 4500 which will make the NPV $ 2500.

1.c) V= C/(k-g) = 4000/(.12-.04) = $ 50,000
Therefore NPV = 50,000 - 35,000 = $ 15,000
Rainbows Products should invest in this project because 20% reinvestment and 4% growth rate will produce a NPV of $ 15,000.

2. Project | Investment | Year 1 | Year 2 | Year 3 | NPV@15% | IRR | 1.Add a New Window | -75000 | 44000 | 44000 | 44000 | 25461.91 | 34.62 | 2.Update Existing Equipment | -50000 | 23000 | 23000 | 23000 | 2514.18 | 18.01 | 3.Build a New Stand | -125000 | 70000 | 70000 | 70000 | 34825.76 | 31.21 | 4.Rent a Larger Stand | -1000 | 12000 | 13000 | 14000 | 28469.88 | 1207.61 | 5.Add new Window & Update Equipment | -125000 | 67000 | 67000 | 67000 | 27976.08 | 28.10 |

Here we have a 5th project merging the first two projects which are mutually exclusive i.e. Adding new window and

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