# The Investment Detective Case

**Topics:**Net present value, Internal rate of return, Bond

**Pages:**6 (671 words)

**Published:**March 23, 2014

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), and Internal Rate of Return (IRR). We are only using quantitative considerations that we think to be relevant and no other project characteristics are deciding factors in our selection of the best four projects.

Payback Period

NPV

PI

IRR

Sum of Cash Flow Benefits

Excess of cash flow over initial investment

Project 1

6 years 22 days

$ 73.09

104%

10.87%

3310

1310

Project 2

2 years

($ 85.45)

96%

6.31%

2165

165

Project 3

15 years

$ 393.92

120%

400%

10000

8000

Project 4

6 years 18 days

$ 228.82

111%

12.33%

3561

1561

Project 5

7 years 1 month 20 days

$ 129.70

106%

11.12 %

4200

2200

Project 6

1 year

0

100%

10%

2200

200

Project 7

1 year 10 months 20 days

$ 165.04

108%

15.26%

2560

560

Project 8

6 years 14 days

$ 182.98

109%

11.41%

4150

2150

When coming up with our calculations to rank the four best projects we have to take into account that each project is going to require an initial investment of two million dollars and in using historical data from other capital budgeting analysts in the firm, we assume that the appropriate discount rate is ten percent for our calculations. After calculating it, we have found the number for every tool on every project, and rank the projects.

Cash Flows

Payback Period

NPV

PI

IRR

Ranking 1

Project 3

Project 6

Project 3

Project 3

Project 3

Ranking 2

Project 5

Project 7

Project 4

Project 4

Project 7

Ranking 3

Project 8

Project 2

Project 8

Project 8

Project 4

Ranking 4

Project 4

Project 8

Project 7

Project 7

Project 8

Ranking 5

Project 1

Project 4

Project 5

Project 5

Project 5

Ranking 6

Project 7

Project 1

Project 1

Project 1

Project 1

Ranking 7

Project 6

Project 5

Project 6

Project 6

Project 6

Ranking 8

Project 2

Project 3

Project 2

Project 2

Project 2

The result is that ranking using capital budgeting techniques differ from the ranking obtained by simple inspection of the cash flows. Even project’s ranking using different methods give a different ranking. Therefore, we are basing our rankings only from the results that we receive from our Net Present Value calculations because we feel this method to be the most consistent and it also takes into account all of the cash flows as well as the time value of money. Most important, The NPV measures how much wealth a project creates or destroys for shareholders. The NPV approach has the clearest link to maximize shareholder wealth and become the “gold standard” for evaluating investment opportunities.

Because we are using the NVP method, the ranking of the project is: Ranking 1

Ranking 2

Ranking 3

Ranking 4

Ranking 5

Ranking 6

Ranking 7

Ranking 8

Project 3

Project 4

Project 8

Project 7

Project 5

Project 1

Project 6

Project 2

Therefore, the best four projects are Project 3 (NPV = $393.92), Project 4 (NPV = $228.82), Project 8 (NPV = $182.98), and Project 7 (NPV = $165.04)

What kinds of real investment projects have cash flows similar to those in Exhibit?

Project 1 is mostly similar to investment in a coupon bond, where you are able to get coupon payments periodically at the end of the period when you get the principal. Project 2 and 6 are most likely like the actual venture capital project where bulks of cash inflows occurs at the end while some of the cash inflows takes place at the beginning. Project 3 is related to zero coupon bond where you can purchase the bond at a specific price and you receive a big cash inflow at the end of...

Please join StudyMode to read the full document