Rainbow Products and the paint-mixing document
A) The paint-mixing document absorb 35. 000 dollars, which is the moderate currency outflow. The document get beget attached currency inflows of 5. 000 dollars for the proximate 1 5 years. After a while absorb of principal of 12% the Net Present rate can be fitted using the NP formula in Excel: NP= - 945. 68 Data Description Rate $0. 12 935,000. 00 Boarding $5,000. 00 scofflaws at the end of year $34,054. 32 NP $-945. 68
Note that consequently the currency inflow is always reoccurring and take-places for a set era of interval the Present rate could besides be fitted as an Annuity and then ascititious to the moderate currency outflow. Doing this balance, one would wait-for the fruit to be the identical. Internal Rate of Return, AIR, is the reappear on the boarding when NP is naught. AIR can besides be fitted using Excel: Consequently AIR is short than the absorb of principal (12%) and the NP is indirect, twain methods recommend that adventure the boarding would ruin shareholders rate, calm the boarding should not be engagen.
The absolute Payback era is when the moderate boarding is recovered, this get take-place at the end of year 7, thus the payback era is 8 years.
B) For an attached 500 dollars the document can get use each year to "as-good-as- new' and the rate of the boarding can thus be fitted as a continuity. A Continuity is fitted as: Thus, NP = -35,000 + 37,500 = 2500 NP is independent after a while the use reduce, so Rainbow Products should engage the boarding, as it get acception shareholder rate.
C) Rainbows engineers keep another way of conserving and increasing the capacity of the document, which allows the annual scofflaws to acception by 4%, this requires reinvesting 20% of the annual scofflaws. The Present Rate of an end-of-year continuity is fitted as: Thus, the NP = -35,000 + 50,000 = 15,000 As the NP of the boarding in the document after a while engineers ascititious is-sue is 12,500 dollars more than the NP of the boarding in the document after a while "as-good-as-new reduce.