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Investment Analysis and Lookheed Tri Star Case

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by

Kevin George

on 4 December 2014

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Transcript of Investment Analysis and Lookheed Tri Star Case

Investment Analysis and Lockheed Tri Star Case
Lockheed Tri Star and Capital Budgeting
Is considering the purchase of a painting-mixing machine to reduce labor costs.

Concession Stand
MBATech, Inc.
Valu-Added
Industries, Inc. (VAI)
Investment Analysis and Lockheed Tri Star Case
By Team #2:
Jovana Micic, Ryan Harvey, Christina Findakly, Douglas Ruhlman, & Kevin George
by Michael E. Edleson
from Harvard Business Publishing
BFIN 3211 Fall 2014
Rainbow Products
Annual CF = $5,000
Number = 15 years
I = 14%
Initial Cost = 35,000
V = C/ (k-g)

A.
Payback Period = 7 years
NPV = -4,289.16
IRR = 11.49 %
REJECT
B.
C.
CF = $4,500 per year in perpetuity
Cost of Capital = 14%

(CF/I) + Initial Cost = NPV
(4,500/.14) - 35,000= -2857.14

32,142.86 < 35,000
NPV= -2,857.14
REJECT
NPV =5,000
ACCEPT
NPV=4160/(.14-.04%)-35,000
Project
Outcome
Add a New Window
Update Existing Equipment
Build a New Stand
Rent a Larger Stand
IRR = 34.62%
IRR = 18.01%
IRR = 31.21%
IRR= 1207.60%
NPV = $22,221.74
NVP= $820.45
NVP= $ 29,670.95
NVP= $27,494.27
Using the internal rate of return rule (IRR), which proposal would you recommend?
Using the net present value rule (NPV), which proposal would you recommend?
How do you explain any differences between the IRR and NPV rankings? Which rule is better?
Rent a Larger Stand
Build a New Stand
Discount rate = 17%
NPV - willing to take the time and more of a risk in the beginning, look at NPV
IRR - Do not have enough capital to invest but quick turnaround, use IRR
NPV = 210,000 - 120,000 = 90,000
Shares = 1,000,000 + 90,000 / 10,000
=$109 = price
120,000 (NPV) /109 = 1,100.92 shares of common stock
It is good because the price per share went from $100 to $109. We see a 9% increase.
negotiating with the mayor of Bean City to start a manufacturing plant in an abandoned building.
Subsidize the project to bring its IRR to 25%
Subsidize the project to provide a two-year payback
Subsidize the project to provide an NPV of $75,000 when cash flows are discounted at 20%
Subsidize the project to provide an accounting rate of return (ARR) of 40%
Which of the four subsidy plans would you recommend to the city if the appropriate discount rate to 20%?
Four Possible Plans:
Initial Cost
1967=-$100
1968-1971=-$200
Production Cost
$14 million per aircraft
35 air crafts per year
6 years
Revenues
$16 million per air craft
25% of Revenue comes two years earlier (deposit)
Discount Rate
13%
Break Even
$12.5 million cost per air craft
Concession Stand
Project
Outcome
Add a New Window
Update Existing Equipment
Build a New Stand
Rent a Larger Stand
IRR = 34.62%
IRR = 18.01%
IRR = 31.21%
IRR= 1207.60%
NPV = $22,221.74
NVP= $820.45
NVP= $ 29,670.95
NVP= $27,494.27
Discount rate = 17%
Concession Stand
Project
Outcome
Add a New Window
Update Existing Equipment
Build a New Stand
Rent a Larger Stand
IRR = 34.62%
IRR = 18.01%
IRR = 31.21%
IRR= 1207.60%
NPV = $22,221.74
NVP= $820.45
NVP= $ 29,670.95
NVP= $27,494.27
Discount rate = 17%
Concession Stand
Project
Outcome
Add a New Window
Update Existing Equipment
Build a New Stand
Rent a Larger Stand
IRR = 34.62%
IRR = 18.01%
IRR = 31.21%
IRR= 1207.60%
NPV = $22,221.74
NVP= $820.45
NVP= $ 29,670.95
NVP= $27,494.27
Discount rate = 17%
Subsidize the project to
bring its IRR to 25% =
Subsidize the project to provide
an NPV of $75,000 when cash
flows are discounted at 20% =
Subsidize the project to provide a
two-year payback =
Subsidize the project to provide
an accounting rate of return (ARR) of 40% =
CF0= -1,000,000
CF1= 355,000
F01= 4
I/Y=25
CPT NPV= -161,632
1,000,000 - 161,632=
$838,368

2=X/355,000

X =
710,000
$290,000
75,000= (-X) + 355,000 + 355,000 + 355,000 + 355,000
(1.2)^1 (1.2)^2 (1.2)^3 (1.2)^4
X = $844,000.74 (Initial Investment)
$156,000
X - (1,000,000/4)

1,000,000/2

40% =
X = $450,000
$380,000
Which of the four subsidy plans
would you recommend to the city
if the appropriate discount rate was
20%?
Part B - Subsidizing the project to provide a two- year payback

NPV = $209,000.77
$290,000 grant
=5,000
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