Investment Analysis and Tri Star Lockheed
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 + 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 …show more content…
NPV = 100 + 200/1.11 + 200/1.12 + 200/1.13 + 200/1.14 = 733,9730893
When the production level is 300, each plane produced contributes 3,5 million to Lockheed. This can be calculated as 16 – 12,5 = 3,5. 16 is the sales price of one plane and 12,5 is the production cost, yielding a contribution margin of 3,5 million dollars.
Thus, the break-even point can be found from the following equation:
Fixed costs / contribution margin = 733,9730893 / 3,5 = 209,706… ~ 210 planes
However, if the production level was only 210 planes, Lockheed would not have a contribution margin of 3,5. Instead, the contribution margin would be just 2 because below the production level of 300 the production cost per unit is 14 million dollars. The correct break-even point would be 733,9730893 / 2 = 366,98… ~ 367 planes.
Therefore, Lockheed did not break even in value terms at a ”break-even” production of 300 units. We can verify this by comparing the net present values at the end of 1967 of both cash outflows