The Case is divided into 5 different mini Cases. Each case is about another scenario.
Case 1 is about a company called Rainbow Products. The company considers the purchase of a paint-mixing machine. The machine costs $35.000 but the company expects an annual saving of $5.000 additional cash flow. The machine is expected to last 15 years and the cost of capital is 12 %.
First I would calculate the NPV and the IRR. If the NPV is higher then the return on the capital market, the project is profitable. The IRR shows me the discount rate that puts the NPV to zero. It could also be explained as the break-even point.
Additionally the company could get a “Good As New” service contract for $500 a year. The machine would then produce cash flows of $4,500 per year.
I would again calculate the NPV with the new cash flow. If the NPV is higher then the return on the capital market I would recommend this project.
The last scenario of this case is that the engineers of Rainbow products found a way to enhance the capability of the machine over time. They should reinvest 20 % of the annual cost savings back into new machine parts. The saving rate is 4 %.
There for you should use a formula which is written in the case. After calculating with this formula, you should decide what to do.
Case 2 is about a concession stand that sells hot dogs, peanuts, popcorn and beer. There are three years left on contract with the ballpark but it will probably not be renewed. I have developed 4 proposals to reduce the lines and increase profits.
1. Adding another window
2. Update the equipment
3. Build a new stand
4. Rent a larger stand
All the costs for these 4 proposals are given as well the discount rate of 15 % and the annual cash flow for the next 3 years.
I would calculate the NPV and the IRR (Break-even). This will show me if my project is profitable compared to the return on the capital market and which one of the 4 proposals is