Investment Analysis and Lockheed Tristar

Rainbow Products

Part ACash Flow

-35000 5000 5000 5000 5000 5000 5000 5000 5000

Payback period 7 yearsIRR 11.49%NPV (Rs.945.68)Decision NO WACC 12%

Part BCash FlowInitial -35000Yr 1 to infinity 4500

Payback period 7.78 yearsIRR 12.86 %NPV 2500 WACC 12%Decision Yes

Part CCash Flow

-35000 4000 4160 4326.4 4499.456 4679.434 4866.612 5061.276 5263.727

Payback period 7.65 yearsIRR 15.43 %NPV 15000Decision Yes

5000 5000 5000 5000 5000 5000 5000

5474.276 5693.247 5920.977 6157.816 till infinity

Investment Analysis and Lockheed Tristar

Inv. CF yr 1 CF yr 2 CF yr 3 IRRAdd a new window -75000 44000 44000 44000 34.6%Update existing equipment -50000 23000 23000 23000 18.0%Build a new stand -125000 70000 70000 70000 31.2%Rent a larger stand -1000 12000 13000 14000 1207.6%

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.

$25,462$2,514

$34,826$28,470

NPV@15%

Investment Analysis and Lockheed Tristar

CF 0 CF1 CF 2 CF 3 CF 4Cash flows w/o subsidy -1000000 371739 371739 371739 371739

A) IRR 25% -877899 371739 371739 371739 371739

Cost to city 122101PV of Cost to city @20% 122,101

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

Cost to city 256522PV of Cost to city @20% 178140

C) NPV 75000 @20% -887334 371739 371739 371739 371739

Cost to city 112666PV of Cost to city @20% 112,666

D) ARR 40% -1000000 371739 371739 371739 684783

Cost to city 313044PV 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 = 210,000 - 110,000 = 100,000

Amount of new equity to be raised = 110,000

Suppose, N = no. of new shares to be issuedP = final share price

N*P = 110,000and (10,000+N)*P = 1210,000 = total value of assets after the project

So, (10,000+N)/N = 11or, N = 1,000

P = $ 110

b) 1000 new shares to be issued @$110c) The project increases the value of the stock of the existing shareholders by $10 (from $100 to $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 yearsProd. Cost = $14 mn per unitSale price = $16 mn per unit

Prodn Year t Inv Costs Rev Cash Flow

1967 0 -100 -1001968 1 -200 -2001969 2 -200 -2001970 3 -200 140 -601971 4 -200 -490 140 -5501972 5 -490 560 701973 6 -490 560 701974 7 -490 560 701975 8 -490 560 701976 9 -490 420 -701977 10 -490 420 420

Total -900 -3430 3360 -480

Accounting profit -480NPV @10% (Rs.584)

b) Prodn. Level = 300 units = 50 units per year for 6 yearsProd. Cost = $12.5 mn per unitSale price = $16 mn per unit

Prodn Year t Inv Costs Rev Cash Flow

1967 0 -100 -1001968 1 -200 -2001969 2 -200 -2001970 3 -200 200 01971 4 -200 -625 200 -6251972 5 -625 800 1751973 6 -625 800 1751974 7 -625 800 1751975 8 -625 800 1751976 9 -625 600 -251977 10 600 600

Total -900 -3750 4800 150

Accounting profit 150NPV @10% (Rs.274)

c) Prodn. Level = 400 units = 67 units per year for 5 years and 65 units in year 6Prod. Cost = $11.75 mn per unitSale price = $16 mn per unit

Prodn Year t Inv Costs Rev Cash Flow

1967 0 -100 -100

1968 1 -200 -2001969 2 -200 -2001970 3 -200 268 681971 4 -200 -787 268 -719.251972 5 -787 1072 284.751973 6 -787 1072 284.751974 7 -787 1072 284.751975 8 -787 1064 276.751976 9 -764 804 40.251977 10 780 780

Total -900 -4700 6400 800

Accounting profit 800NPV @10% Rs.43

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 yearsProd. Cost = $14 mn per unitSale price = $16 mn per unitGovt. to bear the sunk cost of $700 mn till 1970.

Prodn Year t Inv Costs Rev Cash Flow

1967 01968 11969 21970 3 140 1401971 4 -200 -490 140 -5501972 5 -490 560 701973 6 -490 560 701974 7 -490 560 701975 8 -490 560 701976 9 -490 420 -701977 10 -490 420 420

Total -200 -3430 3360 220

Accounting profit 220NPV @10% Rs.16

11.74627