Case analysis Hussainara Khatoon and Ors. V. Home Secretary, State of Bihar, Patna
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Case study report submitted as a part of the Strategy Management course.
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Investment Analysis and Lockheed Tristar Rainbow Products Part A Cash Flow -35000
Add a new window Update existing equipment Build a new stand Rent a larger stand
Inv. -75000 -50000 -125000 -1000
CF yr 1 44000 23000 70000 12000
CF yr 2 44000 23000 70000 13000
a) IRR rule is misleading due to difference in size of investment. b) Using NPV rule, we recommend "Build a new stand". c) The difference in ranking is explained by the size of investment.
CF yr 3 44000 23000 70000 14000
IRR 34.6% 18.0% 31.2% 1207.6%
NPV@15% $25,462 $2,514 $34,826 $28,470
Investment Analysis and Lockheed Tristar
Cash flows w/o subsidy A) IRR 25% Cost to city PV of Cost to city @20% B) 2-year Payback Cost to city PV of Cost to city @20% C) NPV 75000 @20% Cost to city PV of Cost to city @20% D) ARR 40% Cost to city PV of Cost to city @20%
CF 0 -1000000
CF1 371739
CF 2 371739
CF 3 371739
CF 4 371739
-877899
371739
371739
371739
371739
371739
628261
371739
371739
122101 122,101 -1000000
256522 178140 -887334
371739
371739
371739
371739
371739
371739
371739
684783
112666 112,666 -1000000
313044 150966
NPV subsidy option (C) is least costly to the city.
Investment Analysis and Lockheed Tristar a) NPV of project = 210,000 - 110,000 = 100,000
Amount of new equity to be raised = 110,000 Suppose, N = no. of new shares to be issued P = final share price
and So, or,
N*P = 110,000 (10,000+N)*P = 1210,000 = total value of assets after the project (10,000+N)/N = 11 N = 1,000 P = $ 110
b) 1000 new shares to be issued @$110 c) The project increases the value of the stock of the existing shareholders by $10 (from $100 to $110)
Investment Analysis and Lockheed Tristar a) Prodn. Level = 210 units = 35 units per year for 6 years Prod. Cost = $14 mn per unit Sale price = $16 mn per unit Prodn Year t Inv Costs Rev 1967 0 -100 1968 1 -200 1969 2 -200 1970 3 -200 1971 4 -200 -490 1972 5 -490 1973 6 -490 1974 7 -490 1975 8 -490 1976 9 -490 1977 10 -490 Total -900 -3430 Accounting profit NPV @10% b) Prodn. Level = 300 units = 50 units per year for 6 years Prod. Cost = $12.5 mn per unit Sale price = $16 mn per unit Prodn Year t Inv Costs Rev 1967 0 -100 1968 1 -200 1969 2 -200 1970 3 -200 1971 4 -200 -625 1972 5 -625 1973 6 -625 1974 7 -625 1975 8 -625 1976 9 -625 1977 10 Total -900 -3750 Accounting profit NPV @10%
c) Prodn. Level = 400 units = 67 units per year for 5 years and 65 units in year 6 Prod. Cost = $11.75 mn per unit Sale price = $16 mn per unit Prodn Year t Inv Costs Rev Cash Flow 1967 0 -100 -100 1968 1 -200 -200 1969 2 -200 -200
d) The decision to pursue the program was not sound. It affected the shareholder value adversely. e) Prodn. Level = 210 units = 35 units per year for 6 years Prod. Cost = $14 mn per unit Sale price = $16 mn per unit Govt. to bear the sunk cost of $700 mn till 1970. Prodn Year t Inv Costs Rev 1967 0 1968 1 1969 2 1970 3 1971 4 -200 -490 1972 5 -490 1973 6 -490 1974 7 -490 1975 8 -490 1976 9 -490 1977 10 -490 Total -200 -3430 Accounting profit NPV @10%
