WACC

[A]

12%
Expected after-tax
net cash flows (CFt)
Year (t) Paint-mixing machine
0
($35,000)
1
$5,000
2
$5,000
3
$5,000
4
$5,000
5
$5,000
6
$5,000
7
$5,000
8
$5,000
9
$5,000
10
$5,000
11
$5,000
12
$5,000
13
$5,000
14
$5,000
15
$5,000

Cumulative
Cash-flows

Discounted
Cashflows

($35,000)
($30,000)
($25,000)
($20,000)
($15,000)
($10,000)
($5,000)
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
$40,000
NPV

($35,000)
$4,464
$3,986
$3,559
$3,178
$2,837
$2,533
$2,262
$2,019
$1,803
$1,610
$1,437
$1,283
$1,146
$1,023
$913
($946)

IRR

11.5%

Rainbow should not purchase the machine because

1. IRR < WACC
2. NPV < 0
[B]
NPV

$2,500

Rainbow Products may purchase the machine with the service contract as NPV > 0
[C]
Growth Rate
NPV

4%
15000

Rainbow Products may purchase the machine with the service contract as NPV > 0

Cumulative discounted Cashflows

($35,000)
($30,536)
($26,550)
($22,991)
($19,813)
($16,976)
($14,443)
($12,181)
($10,162)
($8,359)
($6,749)
($5,312)
($4,028)
($2,882)
($1,859)
($946)

WACC

15%

Year (t)
0
1
2
3
NPV
IRR

Option 1
Option 2
Option 3
Option 4

Option 1
($75,000)
44,000
44,000
44,000

Expected after-tax
net cash flows (CFt)
Option 2
Option 3
($50,000) ($125,000)
23,000
70,000
23,000
70,000
23,000
70,000

Option 4
($1,000)
12,000
13,000
14,000

$25,461.91 $2,514.18 $34,825.76 $28,469.88

34.6%

Add a new window

Update existing equipment
Build a new stand
Rent a larger stand

18%

31%

1208%

WACC

20%
Expected after-tax
net cash flows (CFt)
Year (t)
0
1
2
3
4

Project S
($1,000,000)
371,739
371,739
371,739
371,739

Cumulative cashflows
($1,000,000)
(628,261)
(256,522)
115,217
486,956
Required

1 IRR

Option 1
($1,000,000)
423,442
423,442
423,442
423,442

Option 2
Option 3
($1,000,000) ($1,000,000)
500,000
415,261
500,000
415,261
500,000
415,261
500,000
415,261

Subsidy
NPV
$155,108
$96,178

18.00%

25.00%

2.69

$384,783

$294,367.28

3 NPV

-$37,666.40

$75,000.00

$130,565.41

$75,000.00

4 ARR

0.243478

0.4 -$173,913.33

$136,246.93

Payback
2 period

$0.00

$75,000.00

Option 4
($826,087)
371,739
371,739
371,739
371,739

Assets
PV of project
Initial cost of project
NPV of the project
Amount to be raised

$1,000,000
$210,000
$110,000
$100,000
$110,000

Total stocks outstanding

Total asset value after the project
New stock price
Issued number of stocks

10,000
$1,100,000
$110
1,000

WACC

10%

End of year Time "Index"

1967
0
1968
1
1969
2
1970
3
1971
4
1972
5
1973
6
1974
7
1975
8
1976
9
1977
10

Preproduction
costs
($100)
($200)
($200)
($200)
($200)

-733.97

Production
Costs

($490)
($490)
($490)
($490)
($490)
($490)

-$2,134

Revenues

$420
$420
$420
$420
$420
$420
$1,829

Deposits

$140
$140
$140
$140
$140
$140

Net Cash- Discounted

flow
cash-flows
($100) ($100.00)
($200) ($181.82)
($200) ($165.29)
($60)
($45.08)
($550) ($375.66)
$70
$43.46
$70
$39.51
$70
$35.92
$70
$32.66
($70)
($29.69)
$420
$161.93
NPV

($584.05)

Cumulative
Cashflows
($100)
($300)
($500)
($560)
($1,110)
($1,040)
($970)
($900)
($830)
($900)
($480)

WACC

10%

End of year Time "Index"

1967
0
1968
1
1969
2
1970
3
1971
4
1972
5
1973
6
1974
7
1975
8
1976
9
1977
10

Preproduction
costs
($100)
($200)
($200)
($200)
($200)

Production
Costs

($625)
($625)
($625)
($625)
($625)
($625)

Revenues

$600
$600
$600
$600
$600
$600

Deposits

$200
$200
$200
$200
$200
$200

Net Cash- Discounted Cumulative

flow
cash-flows Cash flow
($100) ($100.00)
($100)
($200) ($181.82)
($300)
($200) ($165.29)
($500)
$0
$0.00
($500)
($625) ($426.88)
($1,125)
$175
$108.66
($950)
$175
$98.78
($775)
$175
$89.80
($600)
$175
$81.64
($425)
($25) ($10.60)
($450)
$600
$231.33
$150
NPV

($274.38)

Revised production/year
Cost/plane
Cost of Production/year
Deposit (approx)

300/6=50
$12.5
625
4

-1680
-1680

1400
140

700
840

140
1510

23%
17%

-1260

140

1370

10%