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Cond Ition 1-Buyi NG New Mach Ine

1) Rainbow should opt for the "Good as new" servicing option, as it has the highest net cash flow of $37,500 compared to the other two options. 2) The options considered were: buying a new machine, which had an NPV of $14,946 and IRR of 6.7%; servicing the existing machine for $4500 annually in perpetuity; and internally servicing the machine for $5000 annually in perpetuity. 3) The servicing option was determined to have the highest net cash flow calculated as the perpetual cash flow divided by the cost of capital, while the internal option's net cash flow was calculated as the perpetual cash flow divided by the difference

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Ghadeer Mohammed
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35 views

Cond Ition 1-Buyi NG New Mach Ine

1) Rainbow should opt for the "Good as new" servicing option, as it has the highest net cash flow of $37,500 compared to the other two options. 2) The options considered were: buying a new machine, which had an NPV of $14,946 and IRR of 6.7%; servicing the existing machine for $4500 annually in perpetuity; and internally servicing the machine for $5000 annually in perpetuity. 3) The servicing option was determined to have the highest net cash flow calculated as the perpetual cash flow divided by the cost of capital, while the internal option's net cash flow was calculated as the perpetual cash flow divided by the difference

Uploaded by

Ghadeer Mohammed
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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There are 3 condition for analysis in front of Rainbow

1) Buying the machine

2) Servicing the machine

3) Internal Capacity building

Rainbow should go for 2nd option i.e. "Good as New" service contact as the net cash flow is nore
than the other two option.

1)Option one of buying new machine

NPV is $14946

IRR is 6.70% and payback period is 4 years and 2 months.

Cond
ition
1-
Buyi
ng
new
mach
ine

Addit
ional 50
cash 00

Mach 35
ine 00
cost 0

Mach
ine
life 15

cost
of
capit 12
al %

year 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Savin
g in 50 50 50 50 50 50 50 50 50 50 50 50
cost 00 5000 00 00 00 5000 00 00 00 00 00 00 00 00 5000
Add:
Depr 23 23 23 23 23 23 23 23 23 23 23 23 2333.
eciati 33 2333 33 33 33 2333. 33 33 33 33 33 33 33 33 3333
on .3 .3 .3 .3 .3 3 .3 .3 .3 .3 .3 .3 .3 .3 33 B4/15

Free
cash
flow
from 73 73 73 73 73 73 73 73 73 73 73 73 7333.
opera 33 7333 33 33 33 7333. 33 33 33 33 33 33 33 33 3333
tion .3 .3 .3 .3 .3 3 .3 .3 .3 .3 .3 .3 .3 .3 33 P9+P10

Disc
ounte P11/(1+
d $B$6)^P
cash 65 52 46 41 33 29 26 23 21 18 16 15 8
flow 48 5846 20 60 61 3715 17 62 44 61 08 82 81 01 1340

Total
Disc
ounte
d
cash 4994 sum(B1
flow 6 2:P12)

Total
initial 35
invest 00
ment 0

tot
al
ca
sh
inf
lo
w-
tot
al
ca
sh
ou
tfl
o
NPV w
=

14
94 P13-
6 B14
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

-
35
Cash 00 58 52 46 37 33 29 26 23 21 18 16
flow 0 6548 46 20 60 4161 15 17 62 44 61 08 82 81 1501 1340

6. irr(B
70 18:Q
Irr % 18)

Payb
ack

Cum
ulativ 14 21 29 43 51 58 65 73 80 87 95
e 66 99 33 99 33 66 99 33 66 99 33
cashfl 7333. 6. 9. 3. 36666 9. 3. 6. 9. 3. 6. 9. 2. 1026 109999.
ow 0 3 6 9 2 .5 8 1 4 7 0 3 6 9 66.2 6

56 0.154
66 54874
.8 38

B1
4-
F2 F22/G
1 21

4
years
and 2
month
s
Please refer to the attached file for step explanation and calculation along with formula and cell
referred

d.

2) "Good as new " Service the net cash flow from this option is $37500

and formula used is perpetuity cash flow/cost of capital

=>4500/12%

=> $37500

3) Self engineers option gives and net cash flow of $31250 which is more than purchase option but
less than service option.

Here formula used is perpetuity cash flow/(cost of capital-growth rate)

=>5000/(20%-4%)

=>$31250

In this condition required cost of capital is 20%

and growth rate till perpetuity is 4%

Please refer to the attached file for step explanation and calculation along with formula and cell
referred.

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