1. THE INVESTMENT DETECTIVE
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 mutually exclusive projects. Finally, the case is a vehicle for introducing the problem created by attempting to rank projects of unequal life and the solution to that difficulty criterion.

Please answer following questions
1. What analytical criteria can we use to rank the projects? How do you define each criterion? Please evaluate each project using all investment criteria we learned during the class. 2. Which of the two projects, 7 or 8, is more attractive? How sensitive is our ranking to the use of high discount rates? Why do NPV and IRR disagree? 3. What rank should we assign to each project? Why do payback and NPV not agree completely? Which criterion is best? 4. Are those projects comparable on the basis of NPV? Because the projects have different lives, are we really measuring the “net present” value of the short-lived projects?

(Question 4 Hint)
Comparisons based on standard NPV ignore the inequality of project lives such as those in the case. Simply put, short-lived projects could be replicated within the life of the longest project (for example, project 6 could be replicated 15 times within the life of project 3), producing very different time profiles of cash flows for the projects. One solution to this problem is the so-called replacement-chain approach, in which shortlived projects are replicated out to a horizon common with the long-lived projects; the NPV on the entire chain is then calculated and compared with the NPV of the other chain. This approach can be cumbersome, however, in problems with many alternative...

...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...

...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...

...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),...