Lockheed Tri Star Case Studies Essay

2354 Words Dec 14th, 2009 10 Pages
Harvard Business School

Rev. November 17, 1993

Investment Analysis and Lockheed Tri Star
1. Rainbow Products is considering the purchase of a paint-mixing machine to reduce labor costs. The savings are expected to result in additional cash flows to Rainbow of $5,000 per year. The machine costs $35,000 and is expected to last for 15 years. Rainbow has determined that the cost of capital for such an investment is 12%. [A] Compute the payback, net present value (NPV), and internal rate of return (IRR) for this machine. Should Rainbow purchase it? Assume that all cash flows (except the initial purchase) occur at the end of the year, and do not consider taxes. [B] For a $500 per year additional expenditure, Rainbow can get a
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Your firm has 10,000 shares of common stock outstanding, and the current price of the stock is $100 per share. There is no debt; thus, the “market value” balance sheet of VAI looks like: VAI Market Value Balance Sheet Assets $1,000,000 Equity $1,000,000

You then discover an opportunity to invest in a new project that produces positive cash flows with a present value of $210,000. Your total initial costs for investing and developing this project are only $110,000. You will raise the necessary capital for this investment by issuing new equity. All potential purchasers of your common stock will be fully aware of the project’s value and cost, and are willing to pay “fair value” for the new shares of VAI common.

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What is the Net Present Value of this project? How many shares of common stock must be issued (at what price) to raise the required capital? What is the effect of this new project on the value of the stock of the existing shareholders, if any?

Lockheed Tri Star and Capital Budgeting1
In 1971, the American firm Lockheed found itself in Congressional hearings seeking a $250million federal guarantee to secure bank credit required for the completion of the L-1011 Tri Star program. The L-1011 Tri Star Airbus is a wide-bodied commercial jet aircraft with a capacity of up to 400 passengers, competing with the DC-10 trijet and the A-300B airbus. Spokesmen for Lockheed claimed that the Tri Star program was economically sound and that their problem was

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