Investment Analysis

(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 of capital) =4,500 / 0.12 = $37,500

Computation of the NPV :
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NPV= -Initial investment + PV = -35,000 + 37,500
NPV=$2,500

Rainbow products could buy this machine with the service contract if they intent to use it in the long-run.

(C)

Computation of the PV :

PV= C/ k-g

In this case C (end of year perpetuity payout) = 5,000-1,000= $4,000 k= 12%, discount rate g= 4%, growing rate at perpetuity

PV= 4,000 / (0.12-0.04) = $50,000

Computation of the NPV :

NPV= -35,000+ 50,000 = $15,000

The rainbow products company should invest in this project because its NPV is largely positive because of the reinvestment of 20% of the annual cost, even though this is in a very long term vision.

2.

• Computation of the IRRs (with financial calculator) :

Project,

-Add a New Window : IRR = 34.61%
-Update Existing Equipment : IRR = 18.01%
-Build a new stand : IRR = 31.20%
-Rent a larger stand: IRR = 1207%

All projects are acceptable because all the IRRs are higher than the discount rate(15%)

1.

(A)
The payback is 35,000/5,000= 7 years

Computation of the NPV :

15
NPV= -35,000 + ОЈ 5,000 /