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Investment Analysis of Lockheed Tri Star

This case study analyzes an investment in a Lockheed Tri Star machine. It considers several factors: 1. Using payback period, NPV and IRR calculations, the initial proposal to purchase the machine for $35,000 is rejected as the NPV is negative and IRR is below the 12% threshold. 2. However, additional analysis shows a positive NPV if annual cash flows of $4,500 are considered, so purchase is recommended. 3. A third scenario shows an even higher positive NPV if the $4,000 in annual cost savings are reinvested each year. Therefore, the investment is recommended. Of the five investment options provided, the analysis recommends

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244 views2 pages

Investment Analysis of Lockheed Tri Star

This case study analyzes an investment in a Lockheed Tri Star machine. It considers several factors: 1. Using payback period, NPV and IRR calculations, the initial proposal to purchase the machine for $35,000 is rejected as the NPV is negative and IRR is below the 12% threshold. 2. However, additional analysis shows a positive NPV if annual cash flows of $4,500 are considered, so purchase is recommended. 3. A third scenario shows an even higher positive NPV if the $4,000 in annual cost savings are reinvested each year. Therefore, the investment is recommended. Of the five investment options provided, the analysis recommends

Uploaded by

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Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Case study: Investment Analysis and Lockheed Tri Star

MGMTS-2700
Professor Hamza Abdurezak
Harvard University
Yang Zhon
1> A. Payback, NPV, IRR, Should purchase or not?
Payback: $35,000/5000=7 year
NPV: =Co+ C1..n/(1+i)^1.n
Co=-3,5000
CF1-CF15= 5,000; I= 12
Computing result is $-945.67
IRR: 11.49%
NPV is negative and IRR is lower 12% so reject the proposal.
B.
NPV: =Co+ C1..n/(1+i)^1.n
NPV= -35000+(4500/.12)
=2500
NPV is positive so should purchase the machine.
C. NPV: =Co+ C1..n/(1+i)^1.n
= -35,000(4000/(0.12-0.04))
=-35,000+50,000
=15,000
NPV is positive so rainbow should reinvest the cost saving into the machine annually.
2.
Cash Flow:
Investment Y1 Y2 Y3 IRR NPV@15%
1. -75k44k44k44k34.63% 25,461.91
2. -50k23k23k23k18.01% 2,514.18
3. -125k70k70k 70k 31.21%34,825.76
4. - 1k12k13k14k1207.06%28,469.88
5. -125k67k67k 67k28.10% 27,976.08

1,Using IRR I recommend the (4)


2, Using NPV I recommend the proposal (3)
3,NPV is better!
The NPV method is better because it shows the most cash flow as the highest. Because the discount rate
is 15%, it is building a new both is prioritized higher.
4.
1, NPV=PV-Investment
=210k-110k=100k
2. Assuming issue N shares when price is P.
N*P=110,000(1)
P=1,210,000/(10,000+N) (2)
Then computing the result
So N=1000 P=$110
3, Stock price rises up $10 Stock holder make the profit.
Out cash flow in cash flownet cash flow
1967-100-100
1968-200-200
1969-200-200
1970-200140 -60
1971-200-490140-550
1972-490560 70
1973 -490560 70
1974-490560 70
1975-490560 70
1976-490420-70
1977420420
In total -584.05
Acc profit -480
Cost: 14 $mm
Units Per Year: 35
Revenue 16
Quantity: 210
NPV=-584.05mm
Out cash flow in cash flownet cash flow
1967...

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