Investment Analysis
(A)
The payback is 35,000/5,000= 7 years
Computation of the NPV :
15
NPV= -35,000 + Σ 5,000 / ( 1 + 12%)^ 15 i=1
NPV = $- 947. 67
Computation of the IRR : 15
0= -35,000 + Σ 5,000 / ( 1 + IRR)^ 15 i=1
IRR= 11.49%
The NPV of this project is negative and the IRR is lower then the Cost of Capital (12%)
Rainbow products shouldn’t go for it.
(B)
Based on the perpetuity formula we can compute the PV in this case :
Computation of the PV :
PV= Cash flow per year/ cost of capital) =4,500 / 0.12 = $37,500
Computation of the NPV :
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GET BETTER GRADES
NPV= -Initial investment + PV = -35,000 + 37,500
NPV=$2,500
Rainbow products could buy this machine with the service contract if they intent to use it in the long-run.
(C)
Computation of the PV :
PV= C/ k-g
In this case C (end of year perpetuity payout) = 5,000-1,000= $4,000 k= 12%, discount rate g= 4%, growing rate at perpetuity
PV= 4,000 / (0.12-0.04) = $50,000
Computation of the NPV :
NPV= -35,000+ 50,000 = $15,000
The rainbow products company should invest in this project because its NPV is largely positive because of the reinvestment of 20% of the annual cost, even though this is in a very long term vision.
2.
• Computation of the IRRs (with financial calculator) :
Project,
-Add a New Window : IRR = 34.61%
-Update Existing Equipment : IRR = 18.01%
-Build a new stand : IRR = 31.20%
-Rent a larger stand: IRR = 1207%
All projects are acceptable because all the IRRs are higher than the discount rate(15%)
1.
(A)
The payback is 35,000/5,000= 7 years
Computation of the NPV :
15
NPV= -35,000 + ОЈ 5,000 /
The payback is 35,000/5,000= 7 years
Computation of the NPV :
15
NPV= -35,000 + Σ 5,000 / ( 1 + 12%)^ 15 i=1
NPV = $- 947. 67
Computation of the IRR : 15
0= -35,000 + Σ 5,000 / ( 1 + IRR)^ 15 i=1
IRR= 11.49%
The NPV of this project is negative and the IRR is lower then the Cost of Capital (12%)
Rainbow products shouldn’t go for it.
(B)
Based on the perpetuity formula we can compute the PV in this case :
Computation of the PV :
PV= Cash flow per year/ cost of capital) =4,500 / 0.12 = $37,500
Computation of the NPV :
Is this essay helpful? Join OPPapers to read more and access more than 470,000 just like it!
GET BETTER GRADES
NPV= -Initial investment + PV = -35,000 + 37,500
NPV=$2,500
Rainbow products could buy this machine with the service contract if they intent to use it in the long-run.
(C)
Computation of the PV :
PV= C/ k-g
In this case C (end of year perpetuity payout) = 5,000-1,000= $4,000 k= 12%, discount rate g= 4%, growing rate at perpetuity
PV= 4,000 / (0.12-0.04) = $50,000
Computation of the NPV :
NPV= -35,000+ 50,000 = $15,000
The rainbow products company should invest in this project because its NPV is largely positive because of the reinvestment of 20% of the annual cost, even though this is in a very long term vision.
2.
• Computation of the IRRs (with financial calculator) :
Project,
-Add a New Window : IRR = 34.61%
-Update Existing Equipment : IRR = 18.01%
-Build a new stand : IRR = 31.20%
-Rent a larger stand: IRR = 1207%
All projects are acceptable because all the IRRs are higher than the discount rate(15%)
1.
(A)
The payback is 35,000/5,000= 7 years
Computation of the NPV :
15
NPV= -35,000 + ОЈ 5,000 /