Investment Analysis and Lockheed Tristar

Rainbow Products

Part A

Cash Flow

-35000 5000 5000 5000 5000 5000 5000 5000 5000

Payback period 7 years

IRR 1149

NPV (Rs94568)

Decision NO WACC 12

Part B

Cash Flow

Initial -35000

Yr 1 to infinity 4500

Payback period 778 years

IRR 1286

NPV 2500 WACC 12

Decision Yes

Part C

Cash Flow

-35000 4000 4160 43264 4499456 4679434 4866612 5061276 5263727

Payback period 765 years

IRR 1543

NPV 15000

Decision Yes

5000 5000 5000 5000 5000 5000 5000

5474276 5693247 5920977 6157816 till infinity

Investment Analysis and Lockheed Tristar

Inv CF yr 1 CF yr 2 CF yr 3 IRR

Add a new window -75000 44000 44000 44000 346

Update existing equipment -50000 23000 23000 23000 180

Build a new stand -125000 70000 70000 70000 312

Rent a larger stand -1000 12000 13000 14000 12076

a) IRR rule is misleading due to difference in size of investment

b) Using NPV rule we recommend Build a new stand

c) The difference in ranking is explained by the size of investment

NPV15

$25462

$2514

$34826

$28470

5000 5000 5000 5000 5000 5000 5000

5474276 5693247 5920977 6157816 till infinity

Investment Analysis and Lockheed Tristar

Inv CF yr 1 CF yr 2 CF yr 3 IRR

Add a new window -75000 44000 44000 44000 346

Update existing equipment -50000 23000 23000 23000 180

Build a new stand -125000 70000 70000 70000 312

Rent a larger stand -1000 12000 13000 14000 12076

a) IRR rule is misleading due to difference in size of investment

b) Using NPV rule we recommend Build a new stand

c) The difference in ranking is explained by the size of investment

NPV15

$25462

$2514

$34826

$28470

Investment Analysis and Lockheed Tristar

Inv CF yr 1 CF yr 2 CF yr 3 IRR

Add a new window -75000 44000 44000 44000 346

Update existing equipment -50000 23000 23000 23000 180

Build a new stand -125000 70000 70000 70000 312

Rent a larger stand -1000 12000 13000 14000 12076

a) IRR rule is misleading due to difference in size of investment

b) Using NPV rule we recommend Build a new stand

c) The difference in ranking is explained by the size of investment

NPV15

$25462

$2514

$34826

$28470

NPV15

$25462

$2514

$34826

$28470

Investment Analysis and Lockheed Tristar

CF 0 CF1 CF 2 CF 3 CF 4

Cash flows wo subsidy -1000000 371739 371739 371739 371739

A) IRR 25 -877899 371739 371739 371739 371739

Cost to city 122101

PV of Cost to city 20 122101

B) 2-year Payback -1000000 371739 628261 371739 371739

Cost to city 256522

PV of Cost to city 20 178140

C) NPV 75000 20 -887334 371739 371739 371739 371739

Cost to city 112666

PV of Cost to city 20 112666

D) ARR 40 -1000000 371739 371739 371739 684783

Cost to city 313044

PV of Cost to city 20 150966

NPV subsidy option (C) is least costly to the city

Investment Analysis and Lockheed Tristar

a) NPV of project = 210000 - 110000 = 100000

Amount of new equity to be raised = 110000

Suppose

N = no of new shares to be issued

P = final share price

NP = 110000

and (10000+N)P = 1210000 = total value of assets after the project

So (10000+N)N = 11

or N = 1000

P = $ 110

b) 1000 new shares to be issued $110

c) The project increases the value of the stock of the existing shareholders by $10 (from $100 to $110)

Investment Analysis and Lockheed Tristar

a) Prodn Level = 210 units = 35 units per year for 6 years

Prod Cost = $14 mn per unit

Sale price = $16 mn per unit

Prodn

Year t Inv Costs Rev Cash Flow

1967 0 -100 -100

1968 1 -200 -200

1969 2 -200 -200

1970 3 -200 140 -60

1971 4 -200 -490 140 -550

1972 5 -490 560 70

1973 6 -490 560 70

1974 7 -490 560 70

1975 8 -490 560 70

1976 9 -490 420 -70

1977 10 -490 420 420

Total -900 -3430 3360 -480

Accounting profit -480

NPV 10 (Rs584)

b) Prodn Level = 300 units = 50 units per year for 6 years

Prod Cost = $125 mn per unit

Sale price = $16 mn per unit

Prodn

Year t Inv Costs Rev Cash Flow

1967 0 -100 -100

1968 1 -200 -200

1969 2 -200 -200

1970 3 -200 200 0

1971 4 -200 -625 200 -625

1972 5 -625 800 175

1973 6 -625 800 175

1974 7 -625 800 175

1975 8 -625 800 175

1976 9 -625 600 -25

1977 10 600 600

Total -900 -3750 4800 150

Accounting profit 150

NPV 10 (Rs274)

c) Prodn Level = 400 units = 67 units per year for 5 years and 65 units in year 6

Prod Cost = $1175 mn per unit

Sale price = $16 mn per unit

Prodn

Year t Inv Costs Rev Cash Flow

1967 0 -100 -100

1968 1 -200 -200

1969 2 -200 -200

1970 3 -200 268 68

1971 4 -200 -787 268 -71925

1972 5 -787 1072 28475

1973 6 -787 1072 28475

1974 7 -787 1072 28475

1975 8 -787 1064 27675

1976 9 -764 804 4025

1977 10 780 780

Total -900 -4700 6400 800

Accounting profit 800

NPV 10 Rs43

d) The decision to pursue the program was not sound It affected the shareholder value adversely

e) Prodn Level = 210 units = 35 units per year for 6 years

Prod Cost = $14 mn per unit

Sale price = $16 mn per unit

Govt to bear the sunk cost of $700 mn till 1970

Prodn

Year t Inv Costs Rev Cash Flow

1967 0

1968 1

1969 2

1970 3 140 140

1971 4 -200 -490 140 -550

1972 5 -490 560 70

1973 6 -490 560 70

1974 7 -490 560 70

1975 8 -490 560 70

1976 9 -490 420 -70

1977 10 -490 420 420

Total -200 -3430 3360 220

Accounting profit 220

NPV 10 Rs16

1174627

Investment Analysis and Lockheed Tristar

a) NPV of project = 210000 - 110000 = 100000

Amount of new equity to be raised = 110000

Suppose

N = no of new shares to be issued

P = final share price

NP = 110000

and (10000+N)P = 1210000 = total value of assets after the project

So (10000+N)N = 11

or N = 1000

P = $ 110

b) 1000 new shares to be issued $110

c) The project increases the value of the stock of the existing shareholders by $10 (from $100 to $110)

Investment Analysis and Lockheed Tristar

a) Prodn Level = 210 units = 35 units per year for 6 years

Prod Cost = $14 mn per unit

Sale price = $16 mn per unit

Prodn

Year t Inv Costs Rev Cash Flow

1967 0 -100 -100

1968 1 -200 -200

1969 2 -200 -200

1970 3 -200 140 -60

1971 4 -200 -490 140 -550

1972 5 -490 560 70

1973 6 -490 560 70

1974 7 -490 560 70

1975 8 -490 560 70

1976 9 -490 420 -70

1977 10 -490 420 420

Total -900 -3430 3360 -480

Accounting profit -480

NPV 10 (Rs584)

b) Prodn Level = 300 units = 50 units per year for 6 years

Prod Cost = $125 mn per unit

Sale price = $16 mn per unit

Prodn

Year t Inv Costs Rev Cash Flow

1967 0 -100 -100

1968 1 -200 -200

1969 2 -200 -200

1970 3 -200 200 0

1971 4 -200 -625 200 -625

1972 5 -625 800 175

1973 6 -625 800 175

1974 7 -625 800 175

1975 8 -625 800 175

1976 9 -625 600 -25

1977 10 600 600

Total -900 -3750 4800 150

Accounting profit 150

NPV 10 (Rs274)

c) Prodn Level = 400 units = 67 units per year for 5 years and 65 units in year 6

Prod Cost = $1175 mn per unit

Sale price = $16 mn per unit

Prodn

Year t Inv Costs Rev Cash Flow

1967 0 -100 -100

1968 1 -200 -200

1969 2 -200 -200

1970 3 -200 268 68

1971 4 -200 -787 268 -71925

1972 5 -787 1072 28475

1973 6 -787 1072 28475

1974 7 -787 1072 28475

1975 8 -787 1064 27675

1976 9 -764 804 4025

1977 10 780 780

Total -900 -4700 6400 800

Accounting profit 800

NPV 10 Rs43

d) The decision to pursue the program was not sound It affected the shareholder value adversely

e) Prodn Level = 210 units = 35 units per year for 6 years

Prod Cost = $14 mn per unit

Sale price = $16 mn per unit

Govt to bear the sunk cost of $700 mn till 1970

Prodn

Year t Inv Costs Rev Cash Flow

1967 0

1968 1

1969 2

1970 3 140 140

1971 4 -200 -490 140 -550

1972 5 -490 560 70

1973 6 -490 560 70

1974 7 -490 560 70

1975 8 -490 560 70

1976 9 -490 420 -70

1977 10 -490 420 420

Total -200 -3430 3360 220

Accounting profit 220

NPV 10 Rs16

1174627

Investment Analysis and Lockheed Tristar

a) Prodn Level = 210 units = 35 units per year for 6 years

Prod Cost = $14 mn per unit

Sale price = $16 mn per unit

Prodn

Year t Inv Costs Rev Cash Flow

1967 0 -100 -100

1968 1 -200 -200

1969 2 -200 -200

1970 3 -200 140 -60

1971 4 -200 -490 140 -550

1972 5 -490 560 70

1973 6 -490 560 70

1974 7 -490 560 70

1975 8 -490 560 70

1976 9 -490 420 -70

1977 10 -490 420 420

Total -900 -3430 3360 -480

Accounting profit -480

NPV 10 (Rs584)

b) Prodn Level = 300 units = 50 units per year for 6 years

Prod Cost = $125 mn per unit

Sale price = $16 mn per unit

Prodn

Year t Inv Costs Rev Cash Flow

1967 0 -100 -100

1968 1 -200 -200

1969 2 -200 -200

1970 3 -200 200 0

1971 4 -200 -625 200 -625

1972 5 -625 800 175

1973 6 -625 800 175

1974 7 -625 800 175

1975 8 -625 800 175

1976 9 -625 600 -25

1977 10 600 600

Total -900 -3750 4800 150

Accounting profit 150

NPV 10 (Rs274)

c) Prodn Level = 400 units = 67 units per year for 5 years and 65 units in year 6

Prod Cost = $1175 mn per unit

Sale price = $16 mn per unit

Prodn

Year t Inv Costs Rev Cash Flow

1967 0 -100 -100

1968 1 -200 -200

1969 2 -200 -200

1970 3 -200 268 68

1971 4 -200 -787 268 -71925

1972 5 -787 1072 28475

1973 6 -787 1072 28475

1974 7 -787 1072 28475

1975 8 -787 1064 27675

1976 9 -764 804 4025

1977 10 780 780

Total -900 -4700 6400 800

Accounting profit 800

NPV 10 Rs43

d) The decision to pursue the program was not sound It affected the shareholder value adversely

e) Prodn Level = 210 units = 35 units per year for 6 years

Prod Cost = $14 mn per unit

Sale price = $16 mn per unit

Govt to bear the sunk cost of $700 mn till 1970

Prodn

Year t Inv Costs Rev Cash Flow

1967 0

1968 1

1969 2

1970 3 140 140

1971 4 -200 -490 140 -550

1972 5 -490 560 70

1973 6 -490 560 70

1974 7 -490 560 70

1975 8 -490 560 70

1976 9 -490 420 -70

1977 10 -490 420 420

Total -200 -3430 3360 220

Accounting profit 220

NPV 10 Rs16

1174627

1970 3 -200 268 68

1971 4 -200 -787 268 -71925

1972 5 -787 1072 28475

1973 6 -787 1072 28475

1974 7 -787 1072 28475

1975 8 -787 1064 27675

1976 9 -764 804 4025

1977 10 780 780

Total -900 -4700 6400 800

Accounting profit 800

NPV 10 Rs43

d) The decision to pursue the program was not sound It affected the shareholder value adversely

e) Prodn Level = 210 units = 35 units per year for 6 years

Prod Cost = $14 mn per unit

Sale price = $16 mn per unit

Govt to bear the sunk cost of $700 mn till 1970

Prodn

Year t Inv Costs Rev Cash Flow

1967 0

1968 1

1969 2

1970 3 140 140

1971 4 -200 -490 140 -550

1972 5 -490 560 70

1973 6 -490 560 70

1974 7 -490 560 70

1975 8 -490 560 70

1976 9 -490 420 -70

1977 10 -490 420 420

Total -200 -3430 3360 220

Accounting profit 220

NPV 10 Rs16

1174627

1174627