29.08.2019-84 views -Lockheed Hbr Case
Expense Analysis and Lockheed Three Star
WMP 08009 Davinder Singh
WMP 08022 Manish Kumar Singh
WMP08035 Rahul Yadav
WMP08036 Rajesh Ganvir
A report published in completion of the assignments for
Of india Institute of Management, Lucknow
Date: 31. 03. 13
1 . Range Products |: | |
| | | |
Scenario you: Purchase of Paint- Mixing machine to reduce labor cost| | | | |
Expected Saving ($) | 5000| per year|
Cost of equipment ($) | 35000| |
Devaluation in | 15 years| |
Rate @ cost of capital| 12%| |
A: Objective: Compute payback, NPV and IRR to decide whether Rainbow Products should choose the machine or perhaps not.
i)Bay back: expense of machine/expected conserving per year sama dengan 35000/5000 = 7 years.
ii)NPV = Difference between the present value of money inflows and the present value of cash outflows. Thus,
NPV =-35000+5000* [1-(1/(1. 12)^15]/. doze
NPV =-945. 68
iii)IRR: It is that rate of interest that produces the sum of all funds flows actually zero.
0 =-35000+5000* [1-(1/(1+r)^15]/r
IRR =11. 49%
Business Summary: Since NPV is -ve, Rainbow probably should not purchase the Machine.
B: Additional Info: Getting " Good because newвЂќ assistance for 500 usd per year, producing the returning on money flows since $4500 per year in perpetuity.
Cash Flow ($)4500per year in perpetuity
Expense of machine ($) 35000
Devaluation in 12-15 years
Rate @ cost of capital12%
Further Investment ($)500
i)Bay backside: cost of machine/expected saving each year = 35000/4500 = 7. 78 years.
ii)NPV = Difference between your present benefit of cash inflows and the present value of money outflows. As a result,
NPV =-35000+4500/. 12
iii)IRR: It really is that interest rates that makes the sum of cash runs zero.
IRR =12. 86%
Business Bottom line: Since NPV is +ve, Rainbow ought to purchase the Equipment with the scheme.
C: Additional Info: Reinvested twenty percent of gross annual cost conserving of bucks 5000 back into new machine parts Which in turn increases the cost saving simply by 4%in perpetuity to bucks 4160
Cashflow ($)4000per yr in perpetuity
Cost of equipment ($) 35000
Depreciation in 15 years
Rate @ cost of capital12%
Payback periodВ in capital cash strategy refers to the period of time required for the return with an investment to " repay" the total of the unique investment.
i) Pay Back: Among 7 and 8 years
1st Season Net funds flow40004000
next Year Net cash flow41608160
3rd Year Net cash flow4326. 412486. 4
next Year Net cash flow4499. 45616985. 856
5th Yr Net cash flow4679. 4342421665. 29024
sixth Year Net cash flow4866. 6116126531. 90185
7th Yr Net funds flow5061. 27607431593. 17792
8th Year Net cash flow5263. 72711736856. 90504
ii) NPV =-35000 & 4000/. 12 -. '04 = -35000 + 50000
Therefore NPV = 15000
zero =-35000 & 4000/r-g
IRR = 15. 43%
Since NPV is definitely +ve, Rainbow should go to get the option of reinvesting the 20 % back into the business year on year since that brings the IRR above the rate of return of 12 % and thus is a possible option.
queen 2 . HOT dog concession stand
A. Given highest IRR sama dengan 1207. 6%, the option to rent a bigger stand is the most suitable. B. Offered highest NPV = $34, 825. seventy six, the option to build a new stand is best. C. The NPV method needs to be preferred above here because it gives the total net worth which the company makes with option options. The other shortfall with the IRR method is the very fact that it cannot be confidentially found in circumstances where cash flow is usually inconsistent. When working out in such fluctuating...