Investment detective
The Investment Detective 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
1310
2200
560
1561
165
Reinvestment:
Rank
1
2
3
4
5
6
7
8
Project number
3
8
6
1
5
7
4
2
Cash flow
8000
4300
3000
2620
2200
1680
1561
825
However, the rank simply inspected by the cash flows is not the best method to evaluate the projects. Because this method does not consider time period, WACC, Net present value and other factors. All the factors could affect the value of project. 2. To evaluate the investment projects, we can use 5 main methods, NPV, IRR, MIRR, payback and discount payback. Each method has different advantage to evaluate the investment projects. It is better to use NPV and MIRR methods to evaluate the projects. NPV can provide basic accurate methods to use time value of money to estimate investments. MIRR includes both WACC and reinvestment rate; therefore, it is more accurate to evaluate the investments.
3. First, NPV is the most common and useful method. It provides a direct measure of value that increases shareholders’ wealth.
Normal:
Rank
1
2
3
4
5
6
7
8
Project number
3
4
8
7
5
1
6
2
NPV
$393.92
$228.22
$182.98
$165.04
$129.70 73.09
$0.00
-$85.45
Reinvestment:
Rank
1
2
3
4
5
6
7
8
Project number
3
7
8
4
5
1
6
2
NPV
$393.92
$331.15
$276.88
$228.22
$129.70
$107.18
$0.00
-$261.36
Second, IRR and MIRR measure an obvious profitability as a percentage rate of return. Decision makers and investors are very interesting with this rate. But MIRR is better than IRR because MIRR will includes both reinvestment rate and WACC.
IRR
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
1310
2200
560
1561
165
Reinvestment:
Rank
1
2
3
4
5
6
7
8
Project number
3
8
6
1
5
7
4
2
Cash flow
8000
4300
3000
2620
2200
1680
1561
825
However, the rank simply inspected by the cash flows is not the best method to evaluate the projects. Because this method does not consider time period, WACC, Net present value and other factors. All the factors could affect the value of project. 2. To evaluate the investment projects, we can use 5 main methods, NPV, IRR, MIRR, payback and discount payback. Each method has different advantage to evaluate the investment projects. It is better to use NPV and MIRR methods to evaluate the projects. NPV can provide basic accurate methods to use time value of money to estimate investments. MIRR includes both WACC and reinvestment rate; therefore, it is more accurate to evaluate the investments.
3. First, NPV is the most common and useful method. It provides a direct measure of value that increases shareholders’ wealth.
Normal:
Rank
1
2
3
4
5
6
7
8
Project number
3
4
8
7
5
1
6
2
NPV
$393.92
$228.22
$182.98
$165.04
$129.70 73.09
$0.00
-$85.45
Reinvestment:
Rank
1
2
3
4
5
6
7
8
Project number
3
7
8
4
5
1
6
2
NPV
$393.92
$331.15
$276.88
$228.22
$129.70
$107.18
$0.00
-$261.36
Second, IRR and MIRR measure an obvious profitability as a percentage rate of return. Decision makers and investors are very interesting with this rate. But MIRR is better than IRR because MIRR will includes both reinvestment rate and WACC.
IRR