Case Write Up The Investment Detective 1
Case Write-Up: The Investment Detective
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), determining the appropriate discount rate, and evaluating the cash flows using the IRR (Internal Rate of Return), MIRR (Modified Internal Rate of Return), NPV (Net Present Value), and other metrics. Each project is chosen solely on the basis of the quantitative analysis. Here are some factors to consider for this case: Each project has the same initial investment of $2 million; in addition, all are believed to be of the same risk class. The managers have determined that projects 7 and 8 are mutually exclusive. The issue is that the WACC has never been officially estimated and in the past the discount rate has been assumed at 10 percent (however, certain officers have asserted the discount rate to be higher).
Ranking Projects
Ranking projects simply through the inspection of cash flows is inadequate due to the time value of money and cost of capital of companies; the only piece of information that can be derived from looking at the cash flows is the amount of time it would take to be paid back (regular payback period). There are several capital budgeting tools that can be used, including IRR, MIRR, and NPV. These three can be used to see if a project exceeds the expected rate of return or the cost of capital for a company. We also refer to payback, discounted payback period, and a profitability index to help assist the decision-making process for which projects should start to commence. In addition, qualitative factors must be considered for any project given outside of this case, to cover the bases and have successful
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), determining the appropriate discount rate, and evaluating the cash flows using the IRR (Internal Rate of Return), MIRR (Modified Internal Rate of Return), NPV (Net Present Value), and other metrics. Each project is chosen solely on the basis of the quantitative analysis. Here are some factors to consider for this case: Each project has the same initial investment of $2 million; in addition, all are believed to be of the same risk class. The managers have determined that projects 7 and 8 are mutually exclusive. The issue is that the WACC has never been officially estimated and in the past the discount rate has been assumed at 10 percent (however, certain officers have asserted the discount rate to be higher).
Ranking Projects
Ranking projects simply through the inspection of cash flows is inadequate due to the time value of money and cost of capital of companies; the only piece of information that can be derived from looking at the cash flows is the amount of time it would take to be paid back (regular payback period). There are several capital budgeting tools that can be used, including IRR, MIRR, and NPV. These three can be used to see if a project exceeds the expected rate of return or the cost of capital for a company. We also refer to payback, discounted payback period, and a profitability index to help assist the decision-making process for which projects should start to commence. In addition, qualitative factors must be considered for any project given outside of this case, to cover the bases and have successful