Year of Cash Flow

Project Type of Cash Flow 0 1 2 3

Investment $ (10,000.00)
Revenue $ 21,000.00
Operating Expense $ (11,000.00)
A Depreciation $ (10,000.00)
Pre-tax Income $ (10,000.00) $ - $ - $ -
Net Income $ (6,000.00) $ - $ - $ -
Cash Flow $ (10,000.00) $ 10,000.00 $ - $ -

Investment $ (10,000.00)
Revenue $ 15,000.00 $ 17,000.00
Operating Expense $ (5,833.00) $ (7,833.00)
B Depreciation $ (5,000.00) $ (5,000.00)
Pre-Tax Income $ (10,000.00) $ 4,167.00 $ 4,167.00 $ -
Net Income $ (6,000.00) $ 2,500.20 $ 2,500.20 $ -
Cash Flow $ (10,000.00) $ 7,500.20 $ 7,500.20 $ -

Investment $ (10,000.00)
Revenue $ 10,000.00 $ 11,000.00 $ 30,000.00
Operating Expense $ (5,555.00) $ (4,889.00) $ (15,555.00)
C Depreciation $ (3,333.33) $ (3,333.33) $ (3,333.33)
Pre-Tax Income $ (10,000.00) $ 1,111.67 $ 2,777.67 $ 11,111.67
Net Income $ (6,000.00) $ 667.00 $ 1,666.60 $ 6,667.00
Cash Flow $ (10,000.00) $ 4,000.33 $ 4,999.93 $ 10,000.33

Investment $ (10,000.00)
Revenue $ 30,000.00 $ 10,000.00 $ 5,000.00
Operating Expense $ (15,555.00) $ (5,555.00) $ (2,222.00)
D Depreciation $ (3,333.33) $ (3,333.33) $ (3,333.33)
Pre-Tax Income $ (10,000.00) $ 11,111.67 $ 1,111.67 $ (555.33)
Net Income $ (6,000.00) $ 6,667.00 $ 667.00 $ (333.20)
Cash Flow $ (10,000.00) $ 10,000.33 $ 4,000.33 $ 3,000.13
A
1 Payback period A=1 year
Rank High to Low: A or D, B, C B= 2 years
C= 3 years
D= 1 year

2 Accounting return on investment

A= $ -
B= $ 0.50
C= $ 0.60
D= $ 0.47
Rank High to Low: C,B,D,A

3 A IRR = 0%
B IRR = 32%
C IRR = 34%
D IRR = 43%
Rank High to Low: D,C,B,A

4 NPV (10%) NPV (35%)

A $ (909.09) $ (2,592.59)
B $ 3,016.88 $ (328.96)
C $ 5,282.24 $ (228.79)
D $ 4,651.32 $ 822.01

Rank High to Low (10%): C,D,B,A

Rank High to Low (35%): D,C,B,A

The rankings differ because the

methods of measuring focus on
different aspects of the project and
also make different assumptions for
measuring the value of investments.

Payback period measures how quickly the cash flows can a project can recoup the orginal inv
The Accounting Return on Investments measures the average profit that can be expected fro
The Internal Rate of Return measures the effective return rate such that NPV is zero. Assume
 The NPV measures the present value of benefits minus present value of costs. Assumes that m

C If independent, choose B, C, and D because they all have positive NPV and their IRR are great
If mutually exclusive, choose D because it has the highest IRR and NPV if discount is 35%. It a
project can recoup the orginal investments into a project. Assumes that returns from investment continues after payback period
e profit that can be expected from investments. It assumes that money is worth the same at any time - thereby ignoring the tim
te such that NPV is zero. Assumes that money is reinvested
ent value of costs. Assumes that money is reinvested.

sitive NPV and their IRR are greater than the cost of capital
R and NPV if discount is 35%. It also has second highest for other metrics.
es after payback period.
hereby ignoring the time value of money
Timeline
Tax Rate 40%
Net Working Capital: 27%

Year 0 Year 1
A Sales 0.0000 10.0000
Cost of Sales 6.0000
SGA Expenses 2.3500
Introductory Expense 0.2000
Depreciation 0.1000
Income before tax 1.3500
After Tax Income 0.8100
Operating Cash Flow 0.0000 0.9100

Capital Expenditures (Equipment) -0.5000 0.0000

Working Capital 2.7000 3.5100
Net Change in Working Capital 2.7000 0.8100

Free Cash Flow -3.2000 0.1000

B NPV 0.90586
IRR 29.5453%

C Yes because the NPV is positive and the IRR is greater than the discount rate (20%)
 Year 2 Year 3 Year 4 Year 5
13.0000 13.0000 8.6667 4.3333 (In Millions)
7.8000 7.8000 5.2000 2.6000
3.0550 3.0550 2.0367 1.0183
0.0000 0.0000 0.0000 0.0000
0.1000 0.1000 0.1000 0.1000
2.0450 2.0450 1.3300 0.6150
1.2270 1.2270 0.7980 0.3690
1.3270 1.3270 0.8980 0.4690

0.0000 0.0000 0.0000 0.0000

3.5100 2.3400 1.1700 0.0000
0.0000 -1.1700 -1.1700 -1.1700

1.3270 2.4970 2.0680 1.6390

ount rate (20%)

3
A Revenue Cost NPV
210000 110000 100000

B Old Equity Project Equity Total Equity

1000000 100000 1100000

Total Equity Old Shares New Price

1100000 10000 110

Project Cost New Price New Shares

110000 110 1000

C Old Shares New Shares Total Shares

10000 1000 11000

Old Shares Total Shares Total Inflow Equity

10000 11000 1210000

New Shares Total Shares Total Inflow Equity

1000 11000 1210000

The total equity (or worth) of the

company increases by the NPV
amount (10000). Therefore, the price
of stock goes up by 10 to 110.
Therefore, people previously bought
the stock at 100 but now the stock is
worth 110 so they have an unrealized
gain of 10 dollars on each stock
Old Equity
1100000

New Equity
110000
A Cash Flow model of 210 planes at 14 millio
Year 1967
t= 0
Cash Flow at delivery
Deposits
Total Revenues 0

Initial development cost -100

Annual production cost
Total Costs -100

Free Cash Flows -100

NPV = ($584.05)

B Cash Flow model with 300 planes at a cost of 1

Year 1967
t= 0
Cash Flow at delivery
Deposits
Total Revenues 0

Initial development cost -100

Annual production cost
Total Costs -100

Free Cash Flows -100

NPV = ($311.64)
No, NPV is still negative.

C Cash Flow model for break-even

Year 1967
t= 0
Cash Flow at delivery
Deposits
Total Revenues 0

Initial development cost -100

Annual production cost
Total Costs -100
 Free Cash Flows -100
NPV = $1.37
At 479 planes, we have a negative NPV. The NPV is positive at 480 planes.

No, it was not a reasonable one because the Net Present Value of the Tri Star
program was negative. They would need to sell 480 aircraft just to break even.
Assuming an optimistc 10% annual growth in air travel, Lockheed would have to
capture 62% of the total free-world market of wide bodied over the next decade
in order to break even. If we were to assume a more reasonable growth rate of
5%, the total world market would only be 323 aircraft, and Lockheed could not
sell 480 aircraft in a market that's projected to have only 323 aircraft. I would
D predict that the adoption of the Tri Star program would have a negative impact
on shareholder value. It would reduce shareholder value because this program
would not generate a positive net income for the shareholders of the company.
f 210 planes at 14 million cost per plane. Millions of dollars.
1968 1969 1970 1971 1972 1973 1974 1975 1976
1 2 3 4 5 6 7 8 9
420.00 420.00 420.00 420.00 420.00
140.00 140.00 140.00 140.00 140.00 140.00
0 0 140 140.00 560 560 560 560 420

-200 -200 -200 -200

-490 -490 -490 -490 -490 -490
-200 -200 -200 -690 -490 -490 -490 -490 -490

-200 -200 -60 -550.00 70 70 70 70 -70

300 planes at a cost of 12.5 million per plane millions of dollars

1968 1969 1970 1971 1972 1973 1974 1975 1976
1 2 3 4 5 6 7 8 9
600.00 600.00 600.00 600.00 600.00
200.00 200.00 200.00 200.00 200.00 200.00
0 0 200 200.00 800 800 800 800 600

-200 -200 -200 -200 -60

-625 -625 -625 -625 -625 -625
-200 -200 -200 -825 -685 -625 -625 -625 -625

-200 -200 0 -625.00 115 175 175 175 -25

ow model for break-even point millions of dollars

1968 1969 1970 1971 1972 1973 1974 1975 1976
1 2 3 4 5 6 7 8 9
960.00 960.00 960.00 960.00 960.00
320.00 320.00 320.00 320.00 320.00 320.00
0 0 320 320.00 1280 1280 1280 1280 960

-200 -200 -200 -200

-1000 -1000 -1000 -1000 -1000 -1000
-200 -200 -200 -1200 -1000 -1000 -1000 -1000 -1000
-200 -200 120 -880.00 280 280 280 280 -40
 Assumptions
1977 Total Planes = 210
10 Duration (years) = 6
420.00 Planes per year = 35
Cost per plane (millions) = 14
420.00 Annual production cost = 490
Revenue per plane (millions)= 16
Annual sales = 560
Cash flow for deposit = 140.00
0 Cash flow for sale year = 420.00
Years received early = 2
420.00 % deposits received= 25%
Pre-Tri Star = 9%
Discount rate = 10%

Assumptions
1977 Total Planes = 300
10 Duration (years) = 6
600.00 Planes per year = 50
Cost per plane (millions) = 12.5
600.00 Annual production cost = 625
Revenue per plane (millions)= 16
Annual sales = 800
Cash flow for deposit = 200.00
0 Cash flow for sale year = 600.00
Years received early = 2
600.00 % deposits received= 25%
Pre-Tri Star = 9%
Discount rate = 10%

Assumptions
1977 Total Planes = 480
10 Duration (years) = 6
960.00 Planes per year = 80
Cost per plane (millions) = 12.5
960.00 Annual production cost = 1000
Revenue per plane (millions)= 16
Annual sales = 1280
Cash flow for deposit = 320.00
0 Cash flow for sale year = 960.00
 Years received early = 2
960.00 % deposits received= 25%
Pre-Tri Star = 9%
Discount rate = 10%