The investment Detective
Answer Q1:
We can rank the projects by simply inspecting the cash flows (mention bellow), yet it’s not a good measure to rank them.
We can’t rank the projects by only simple inspection of the cash flows because of the time value of money and cost of capital of companies. We use capital budgeting tools to measure financial performance of projects.
The Ranking by simply inspecting the cash flows:
Rank
1st
2nd
3rd
4th
5th
6th
7th
8th
Projects
3
5
8
4
1
7
6
2
Cash Flows
$10,000
$4,200
$4,150
$3,561
$3,310
$2,560
$2,200
$2,165
Answer Q2:
In order to rank these projects, in a purely quantitative manner, we used the following for the 8 projects:
A. Net Present Value (NPV)
B. Internal Rate of Return (IRR)
C. Payback Period (PP)
D. Profitability Index (PI)
A. Net Present Value (NPV)
Year
Project 1
Project 2
Project 3
Project 4
Project 5
Project 6
Project 7
Project 8
0
($2,000)
($2,000)
($2,000)
($2,000)
($2,000)
($2,000)
($2,000)
($2,000)
1
300.00
1,514.55
-
145.45
254.55
2,000.00
1,090.91
(318.18 )
2
272.73
276.03
-
165.29
231.40
-
743.80
(49.59)
3
247.93
123.97
-
262.96
210.37
-
225.39
45.08
4
225.39
-
-
269.79
191.24
-
61.47
239.05
5
204.90
-
-
268.24
173.86
-
43.46
434.64
6
186.28
-
-
248.37
158.05
-
-
677.37
7
169.34
-
-
226.82
143.68
-
-
1,154.61
8
466.51
-
-
207.13
130.62
-
-
-
9
-
-
-
189.15
118.75
-
-
-
10
-
-
-
172.72
107.95
-
-
-
11
-
-
-
157.72
98.14
-
-
-
12
-
-
-
143.70
89.22
-
-
-
13
-
-
-
130.64
81.11
-
-
-
14
-
-
-
119.03
73.73
-
-
-
15
-
-
-
-
67.03
-
-
-
S PV(CF)
2,073.086
1,914.545
2,393.920
2,228.222
2,129.702
2,000
2,165.041
2,182.984
NPV
73.086
(85.455)
393.920
228.222
129.702
0
165.041
182.984
Rank
6th
8th
1st
2nd
5th
7th
4th