Investment detective

Topics: Net present value, Investment, Rate of return Pages: 11 (788 words) Published: March 25, 2014
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 Normal:

Rank
1
2
3
4
5
6
7
8
Project number
7
4
8
3
5
1
6
2
IRR
15.26%
12.33%
11.41%
11.33%
11.12%
10.87%
10.00%
6.31%
IRR 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
MRR Normal:
Rank
1
2
3
4
5
6
7
8
Project number
7
3
8
4
1
5
6
2
MIRR
11.76%
11.33%
11.18%
10.65%
10.49%
10.46%
10.00%
8.41%
MIRR Reinvestment:
Rank
1
2
3
4
5
5
6
7
Project number
3
8
4
7
2
5
1
6
MIRR
11.33%
10.81%
10.65%
10.59%
9.66%
10.46%
10.29%
10.00%
Besides, payback and discount payback methods can also be used. These methods can provide very important information about risk and liquidity. The shorter the payback is, the higher the project’s liquidity will be. But there are not the best methods to estimate. Regular Payback for Normal Investment

Rank
1
2
3
4
5
6
7
8
Project number
6
7
2
8
4
1
5
3
Payback
-0.29
1.89
2
6.04
6.05
6.06
7.14
14.2
Regular Payback for Reinvestment
Rank
1
2
3
4
5
6
7
8
Project number
6
7
2
8
4
1
5
3
Payback
10
1.89
4.51
6.4
6.05
6.06
7.14
14.2

The Discount Payback method is in the following Appendix.
4. Project 1 is very similar with amortizing fix-rate bond. The current price of the bond is $2,000,000. Also, it has constant PMT as $330,000 and par value as $1,000,000. For project 2, the cash inflow is only for three years and the annual cash inflows are decreased. It could be advertising campaign, because the annual rate of return of advertising gets lower. Project 3 is very similar with the Mortgage investment. People bought a house that costs $2,000,000, and the householder sells it for $10,000,000 after 15 years. Project 4 could be investment on an environmental unfriendly factory. After the factory stop working, it needs to spend money to clean up the materials that threats the environment. Therefore, it will generate...
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