Yonsei University
Graduate School of Business
Corporate Finance
Harvard Business Case
Investment Analysis and Tri Star Lockheed
1.
(A)
The payback is 35,000/5,000= 7 years
Computation of the NPV :
15
NPV= -35,000 + S 5,000 / ( 1 + 12%)^ 15
i=1
NPV = $- 947. 67
Computation of the IRR :
15
0= -35,000 + S 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 :
NPV= -Initial investment + PV
= -35,000 + 37,500
NPV=$2,500