I will be analysing your three investment choices using three criteria, the net present value and internal rate of return and payback period. In analysing the following investments I have not taken into account the effects of taxation

Ranking of investments

Investment 3 has the best rating using the three analysis tools, the initial investment is paid back after 5.05 years, followed by investment 2

Limitations of analysis using NPV, IRR and PP

The results given from Net present value are affected by the discount rate and we have to assume that the rate will be the same over the life of the investment, however in reality the costs of money and thus discount rate can change monthly and it is unrealistic to assume that the discount rate will remain the same over the investment life

The internal rate of return does not factor in inflation or when applicable the costs of borrowing money in the rate it gives thus it is a higher rate than it should be as it ignores other costs.

Payback period does not put any value on returns after the initial investment is recouped, it also does not consider any additional outgoings.

Which investment should be chosen?
When selecting which investment risk has to be considered as well as what the other options are. Investment 1 and 2 carry virtually the same level of risk so comparing them is relatively simple just look at the numbers, when looking at the rankings investment 2 clearly outperforms investment 1. When comparing investment 3 to the other investments it is not so straightforward as returns cannot be certain and there are a lot of variables that will affect the return. Investment 2 and 3 both give the required rate of return it is up to you the investor to choose from an adequate return with low risk or a higher return with high risk.

Risks involved in each investment

Investment 1, Inflation is the major risk of this...

...Case 17 – The Investment Detective
The case of the Investment Detective laid out the cash flows for us in each of eight different projects. Before doing any calculations we came up with the assumption that we could not rank the projects simply by inspecting the cash flows.
Without the ability to rank the projects based off of cash flows solely, we had to use some analytical criteria as a capital budgeting analyst to provide some thorough support and reasoning...

...Analysis
Actually, we can rank the projects by simply inspecting the cash flows. However, it is not a good method to rank the projects. In order to ensure that the investment projects selected have the best chance of increasing the value of the firm, we need tools to evaluate the merits of individual projects and to rank competing investments. In this case, our group using some tools which are Payback Period, Net Present Value (NPV) , Profitability Index (PI),...

...The comparison of NPV & Other investment rules
Comparison of NPV & Other Investment Rules
Capital budgeting is important for a company to make decisions on investments and financing issues. However, there are various methods can be used for corporate financing, among which Net Present Value (NPV) is the best rule which can always lead to the correct choices. Except NPV, the company can also use payback period, discounted payback period...

...Investment Appraisal
Investment: Spending money into something with an expectation of making profit/ increasing wealth in the future
Investment Appraisal: Is a process of evaluating the attractiveness of an investment proposal using various techniques/methods,
Methods
Payback period
Accounting rate of return (ARR – ROCE)
Investment appraisal
Internal rate of...

...the wealth. Capital investment appraisal is the budgeting of major capital and investment to company expenditure which facilitates the determination of the concerned firm's investments. Doubtlessly, firms will benefit from modern financial technology. The most common ways of investment appraisal are payback, IRR and NPV methods; each of them has its own strengths and weaknesses from a perspective of decision making. In this essay, the...

...Explain the theoretical rationale for the NPV approach to investment appraisal
and compare the strengths and weaknesses of the NPV approach to two other commonly used approaches.
One of the key areas of long-term decision-making that firms must tackle is that of investment - the need to commit funds by purchasing land, buildings, machinery, etc., in anticipation of being able to earn an income greater than the funds committed. In order to handle these...

...Present Value and Other Investment
Question 1 : List the methods that a firm can use to evaluate a potential investment.
There are discounted and non-discounted cash-flow capital budgeting criteria to evaluate proposed investments. They are
1) Net present value: NPV is a discounted cash flow technique, which is the difference between an investment’s market value and its cost.
NPV = Present value of cash inflow- Present value of...

...Prepare a critical evaluation of three basic methods of evaluating an investment (IRR, Payback and NPV).
There are several basic methods of evaluating an investments that are commonly used by decision makers in both private corporations and public agencies. Each of these measures is intended to be an indicator of profit or net benefit for a project under consideration. Some of these measures indicate the size of the profit at a specific point in time; others...