Rainbow Products
Advanced Finance
1. Homework
Investment Analysis
1. Question Rainbow Products
Savings - $5000/year
Machine costs $35.000
Expected to last for 15 years
Cost of capital 12%
A. payback?, NPV?, IRR?
Payback: The amount of time required for a firm to recover its initial investment. by dividing the initial investment by the annual cash inflow.
In our case $35.000/$5000= 7years
NPV: Investment- the PV of its cash inflows discounted at a rate( the firm’s cost of capital)
NPV= -$35.000- $34.054= -$946 so NPV less than $0, the project rejected
IRR: discount rate, with IRR the NPV=0
IRR= 11,49%
IRR less than the cost of capital (12%), we reject the project.
B. payback?, NPV?, IRR?
Payback:
In this case $35.000/$4500= 7,77years=8years
NPV: Investment- the PV of its cash inflows discounted at a rate( the firm’s cost of capital)
In perpetuity means: constant stream of cash flows with no end – PV= C/r
NPV= -$35.000+$37500= $2500 so NPV greater than $0, the project accepted
IRR: discount rate, with IRR the NPV=0
IRR= 12,86%
IRRgreater than the cost of capital (12%), we accept the project.
C. payback?, NPV?, IRR?
Payback: mixed of cash inflows, we accumulated until the investment is recovered
In this case in 7th year is $31.593 it’s not enough so in 8th year will be recovered
NPV: Investment- the PV of an initial end-of-year perpetuity payout of $C (growing at g%) per period, with a discount rate of k%: = PV= C/(k-g)
NPV= -$35.000+ $50000= $15000 so NPV greater than $0, the project accepted
IRR: discount rate, with IRR the NPV=0
IRR= 15,43%
IRRgreater than the cost of capital (12%), we accept the project.
2. Question „Ball park”
In case of IRR calculation we recommend the project D, so renting a larger stand. Because a project with a higher IRR value than other options would still provide a much better chance of strong growth. Near NPV results we can recommend the project C, so
1. Homework
Investment Analysis
1. Question Rainbow Products
Savings - $5000/year
Machine costs $35.000
Expected to last for 15 years
Cost of capital 12%
A. payback?, NPV?, IRR?
Payback: The amount of time required for a firm to recover its initial investment. by dividing the initial investment by the annual cash inflow.
In our case $35.000/$5000= 7years
NPV: Investment- the PV of its cash inflows discounted at a rate( the firm’s cost of capital)
NPV= -$35.000- $34.054= -$946 so NPV less than $0, the project rejected
IRR: discount rate, with IRR the NPV=0
IRR= 11,49%
IRR less than the cost of capital (12%), we reject the project.
B. payback?, NPV?, IRR?
Payback:
In this case $35.000/$4500= 7,77years=8years
NPV: Investment- the PV of its cash inflows discounted at a rate( the firm’s cost of capital)
In perpetuity means: constant stream of cash flows with no end – PV= C/r
NPV= -$35.000+$37500= $2500 so NPV greater than $0, the project accepted
IRR: discount rate, with IRR the NPV=0
IRR= 12,86%
IRRgreater than the cost of capital (12%), we accept the project.
C. payback?, NPV?, IRR?
Payback: mixed of cash inflows, we accumulated until the investment is recovered
In this case in 7th year is $31.593 it’s not enough so in 8th year will be recovered
NPV: Investment- the PV of an initial end-of-year perpetuity payout of $C (growing at g%) per period, with a discount rate of k%: = PV= C/(k-g)
NPV= -$35.000+ $50000= $15000 so NPV greater than $0, the project accepted
IRR: discount rate, with IRR the NPV=0
IRR= 15,43%
IRRgreater than the cost of capital (12%), we accept the project.
2. Question „Ball park”
In case of IRR calculation we recommend the project D, so renting a larger stand. Because a project with a higher IRR value than other options would still provide a much better chance of strong growth. Near NPV results we can recommend the project C, so