Case Study: The Investment Detective
Primary consideration is the capital availability. If the firm has unlimited access to capital and no other investment options, Net Present Value would become recommended quantitative method. On the other hand, if the time horizon and payback period matter, the company should use Internal Rate of Return Calculation. 1.Looking at the cash flows doesn’t really say much. The assumption is that the firm is in the business to make profit. Profit is equal return on investment cost of borrowing. If the WACC is 10% or higher, firm should make more than 10% as return on investment. Looking at the cash flows only gives an idea of how much excess of cash flow over initial investment is made. Implementing the time value of money, larger cash stream in first years are better. The year in which payback was accomplished plays key role in this case. Sooner the payback is accomplished, sooner the company can free up capital investment, use funds on different projects, and benefit from excess CF to be provided. Just by looking at CF I would rank investments in following order: 3, 4, 7, 1, 5, 8, 6, 2. This already involves some consideration of timeliness of cash streams. If we have only considered biggest cash flow yields the rank would be: 3, 5, 8, 4, 1, 7, 6, 2.

2.Timelines of cash flows is important with respect to reaching breakeven point. For this reason using the logarithm for Internal Rate of Return is the best quantitative method. Other quantitative methods are Net Present Value, Payback Period, Discounted Payback Period, and Profitability Index.

3.Two most popular and technically correct ways to determine which investment options are the best: a.Calculating effective rate or return (IRR)
b.Discounting cash flows and finding net present value (NPV) Pr / Yr12345678
0-2000-2000-2000-2000-2000-2000-2000-2000
13301666016028022001200-350
233033402002800900-60
333016503502800300...

...Case 17 – The InvestmentDetective
The case of the InvestmentDetective 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...

...The InvestmentDetective Case
We can use normal investment to calculate the data, but we also can do it as reinvestment to invest every project for the same years. For every question, I will give answers for both normal investment and reinvestment.
1. We can rank the projects simply by the cash flow data.
Normal investment:
Rank
1
2
3
4
5
6
7
8
Project number
3
8
6
1
5
7
4
2
Cash flow
8000
2150
200...

...1. THE INVESTMENTDETECTIVE
This case presents the cash flows of eight unidentified investments, all of equal initial investment size. The student’s task is to rank the projects. The first objective of the case is to examine critically the principal capital-budgeting criteria. A second objective is to consider the problem that arises when net present value (NPV) and internal rate of return (IRR) disagree as to the ranking of two...

...Case #17 – The InvestmentDetective
It is the job of every financial analyst to make sure solid recommendations are given to the Controller, CFO, or the Board of Directors. Sometimes it can be difficult to know which quantitative analysis to use and why to use a particular one. There are certain times when simply using the sum of the Cash Flows will be sufficient. For example, if you do not want to take into account the time/value of money, or factor in the...

...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),...

...For the exclusive use of S. YAN
￼UV0072 Version 2.2
￼THE INVESTMENTDETECTIVE
The essence of capital budgeting and resource allocation is a search for good investments in which to place the firm’s capital. The process can be simple when viewed in purely mechanical terms, but a number of subtle issues can obscure the best investment choices. The capital-budgeting analyst, therefore, is necessarily a detective who must...

...Case Write-Up: The InvestmentDetective
Case Summary
The purpose of this case is to become a capital budgeting analyst and evaluate which set of free cash flows for 8 projects will result in the most effective investment for a firm’s capital. The objective given is to rank the four best that the company should accept. The case is broken down into three separate steps including the given information about estimated cash flows (inflows & outflows),...

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