Rainbow products

Rainbow Products

• A) Payback = 7 years; NPV = -$945. 68; IRR = 11. 49. Rainbow should not purchase because the IRR is less than the cost of capital and also the NPV is negative.
• B) PV of the Perpetuity = C/r = $37, 500; NPV = Investment + PV = $2, 500. Since this NPV is positive, Rainbow should purchase the service contract.
• C) V = C/(k-g) = $50, 000; NPV = $15, 000. Rainbow Products should accept this option due to its positive NPV. This would be the best choice for Rainbow Products since it has the largest NPV.

Hot Dog Stand

• A) Using the IRR, I would recommend the 1207. 6% or the rent a larger stand option.
• B) Using the NPV, I would recommend the $34, 825. 76 of building a new stand.
• C) IRR shows the return on themoneyspent while NPV shows the future dollar value of the investment. An IRR will look good if the initial investment is low but NPV shows a better picture of what can be earned back in dollar values. That is why it is better to follow the NPV rule over the IRR rule.

Lockheed Tri-Star

1. At the planned production level of 210 units at an estimated cost of $14 million and piece the NPV was -$584 million.
2. Even the industry analysts seemed to be wrong with their breakeven point of 300 units because the NPV at 300 units was -$247 million. This was at a modest discount rate of 10% even though the cost of capital was probably higher due to the riskiness of the investment.
3. To predict the sales volume that would reach the true economic break-even for Tri-Star means that a couple of variables have to be estimated. Due to a learning curve, I have estimated the costs per unit and placed them in the table below. Using excel, I used a trial and error set up to work the number of needed production by getting NPV as close to zero as possible. My calculations brought me to 458 aircraft with a cost of $11. 5 million per aircraft.
4. This decision was a terrible idea and an extremely unreasonable decision. This was a case of over-ambition and poor analysis that lead a company in a bad direction. This bad project reduced its stock price to $11 from the $64 it was 4 years prior.