Beruflich Dokumente
Kultur Dokumente
Case:
popcorn, and beer at a ball park.You have three years left on the
renewed.Long lines limit sales and profits. You have developed four
Add a New
-$75,000 44,000 44,000 44,000
Window
Update Existing
-50,000 23,000 23,000 23,000
Equipment
Build a New
-125000 70,000 70,000 70,000
Stand
Rent a Larger
-1,000 12,000 13,000 14,000
Stand
IRR vs NPV
Project 1: IRR=34.61907%
Project 2: IRR=18.01033%
Project 3: IRR=31.20859%
Project 4: IRR=1207.606%
Project 1: NPV=$25,462
Project 2: NPV=$2,514
Project 3: NPV=$34,826
Project 4: NPV=$28,470
Add a New
-$75,000 44,000 44,000 44,000 34.61907% $25,462
Window
Update
Existing -50,000 23,000 23,000 23,000 18.01033% $2,514
Equipment
Build a
-125000 70,000 70,000 70,000 31.20859% $34,826
New Stand
Rent a
Larger -1,000 12,000 13,000 14,000 1207.606% $28,470
Stand
MBATech INC. Bean City
Some Information
We are hired by the mayor of Bean City
The city has agreed to subsidize MBAT
Subsidize- A benefit given by the government to groups or individuals usually
in the form of a cash payment or tax reduction. The subsidy is usually given to
remove some type of burden and is often considered to be in the interest of
the public.
MBATech, Inc. has given us 4 choices
MBATech INC. Bean City: Original CF
In order for their project to reach its IRR goal to 25% from 18%
We use the Original CF, but we input I as 25% in order to get NPV -$122101.18
We give a subsidy of $122,101.18 at Year 0.
Outcome IRR has increase 7%, reaching its goal of 25%
Recall the different NPV between original Cash flow and plan A
If we put $122,101.8 in Future Value of 4 years, it equals 298098. Based on this
logic, we could either give a subsidy at year 0, decreasing MBAT initial cost to
$877898.82 or we could give the future value of $298098 at year 4. Both
corresponds to IRR at 25%.
MBATech. Inc. Bean City
$1,000,000/10,000=$100
Existing shareholders will get extra $10 from each share they have.
Investment Analysis and Lockheed Tri Star
The process in which a business determines whether projects such as building a new
Where:
Lockheed searches a federal guarantee for its Tri Star program for $250 million due to liquidity crisis. But the firm
considers itself “economically sound.”
Others opposed to the guarantee claim:
“Tri Star program had been economically unsound and condemned to financial failure”
Discussion of viability,
The program should be estimated on “break-even sales”
r = 10%
NPV = $ - 274.38 M
IRR = 2.38%, NPV = 0
Lockheed Tri Star - Capital Budgeting
Federal Guarantee 250 million
Investment (Preproduction outflows) 1967-1971 period
Production outflows 1971-1976 period
Revenue inflows 1972-1977 period
Average production cost 12.5 million
Revenue per aircraft 16 million
Before Guarantee 300 aircrafts
Time "Index" t=0 t=1 t=2 t=3 t=4 t=5 t=6 t=7 t=8 t=9 t = 10
Years 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977
Investment (pre-production) (100.00) (200.00) (200.00) (200.00) (200.00)
Average Production Cost (625.00) (625.00) (625.00) (625.00) (625.00) (625.00)
Revenues 600.00 600.00 600.00 600.00 600.00 600.00
Deposits toward future deliveries 200.00 200.00 200.00 200.00 200.00 200.00
Cash Flow (100.00) (200.00) (200.00) - (625.00) 175.00 175.00 175.00 175.00 (25.00) 600.00
Value Added? (c)
At what sales volume did the Tri Star program reach the
true economic (as opposed to accounting) break-even?
The Tri Star program reached the true economic break-even (NPV) to a level of 420
aircrafts produced.
ECONOMIC BREAK-EVEN ACCOUNTING BREAK-EVEN
- Was the decision to pursue the Tri Star program a reasonable one?
No, it was not a reasonable one because its NPV was negative to IRR of 10%.