Rainbow products

May 6th, 2015
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A) Payback = 7 years; NPV = -$945.68; IRR = 11.49. Rainbow should not purchase because the IRR is less than the cost of capital and also the NPV is negative. B) PV of the Perpetuity = C/r = $37,500; NPV = Investment + PV = $2,500. Since this NPV is positive, Rainbow should purchase the service contract. C) V = C/(k-g) = $50,000; NPV = $15,000. Rainbow Products should accept this option due to its positive NPV. This would be the best choice for Rainbow Products since it has the largest NPV.

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