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The investment detective case 17

25/12/2020 Client: saad24vbs Deadline: 10 Days

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


3rd


B. Internal Rate of Return (IRR)


Projects


Project 1


Project 2


Project 3


Project 4


Project 5


Project 6


Project 7


Project 8


IRR


10.87%


6.31%


11.33%


12.33%


11.12%


10.00%


15.26%


11.41%


Rank


6th


8th


4th


2nd


5th


7th


1st


3rd


All of these projects are accepted except Project 2 because its cost of capital has higher percentage than the percentage project internal rate of return. Moreover, Project 6 will be a subject of be in different because the cost of capital equal to internal rate of return, which lead to break even project.


COC = 10%


C. Payback Period (PP)


In Payback Period there are two method, non-discounted cash flow and discounted cash flow. Drawback of non-discounted cash flow does not consider TVM and the rate of return, and the discounted cash flow does not examine all the cash flows.


Projects


Project 1


Project 2


Project 3


Project 4


Project 5


Project 6


Project 7


Project 8


Payback Year


7


2


15


6


8


1


2


7


Payback


2,310


2,000


10,000


1,977


2,240


2,200


2,100


4,150


Discounted Payback


1,606.58


1,790.58


2,393.92


1,360.10


1,493.78


2,000


1,834.71


2,182.98


Decision (DPP)


Reject


Reject


Accept


Reject


Reject


Be in different


Reject


Accept


Rank


6th


5th


1st


8th


7th


3rd


4th


2nd


D. Profitability Index (PI)


Projects


Project 1


Project 2


Project 3


Project 4


Project 5


Project 6


Project 7


Project 8


PI


1.037


0.957


1.197


1.092


1.065


1.000


1.083


1.0773


Rank


6th


8th


1st


2nd


5th


7th


3rd


4th


All the projects will be undertaken except for project 8 since it is mutually exclusive with project 7, and project 6 and 2 will not be undertaken since they have IRR that is less than the 10%, the discount rate. Project 1 also might not be taken since “certain officers of the company have recently asserted that the discount rate should be much higher.”


Rank


1st


2nd


Project


8


7


IRR


11.41%


15.26%


NPV


182.98


165.04


Since these two projects are mutually exclusive and have the IRR above 10%, Project 8 will be chosen because it has higher NPV.


Rank


1st


2nd


3rd


4th


5th


6th


7th


8th


Project


3


4


8


7


5


1


6


2


PI


1.197


1.092


1.083


1.0773


1.065


1.037


1.000


0.957


All the projects will be undertaken except for project 7 since it is mutually exclusive with project 8, and project 6 and 2 will not be undertaken since they have PI’s equal to 1 and 0.957, because they are not greater than 1.


Selected Projects as per the quantitative methods as follow:


Rank


1st


2nd


3rd


4th


Projects


Projects 3


Projects 4


Projects 8


Projects 5


• Comparing the quantitative methods, we noticed that project 3 scored 1st four times using simple inspections of cash flows, NPV, PP, and PI. Project 7 however, scored 1st only through using the IRR method. Looking on the last ranked projects, project 2 has scored last 4 times using simple inspections of cash flows, NPV, IRR, and PI.


• Net Present Value is considered the best approach since it:


i. Uses Cash Flows.


ii. Uses all the Cash Flows of the project.


iii. And discounts the Cash Flows properly.


And through using the NPV approach, Project 3 got the highest NPV, 393.92, and then comes 4, 8, 5 and 1.


Answer 3:


Selected Projects as per the quantitative methods as follow:


Rank


1st


2nd


3rd


4th


Projects


Projects 3


Projects 4


Projects 8


Projects 5


The above table showing that it is absolutely the rank will be differ from the ranking obtain by simple inception of the cash flow


Answer 4:


Project 1 Bonds


Project 2 Equipment Depreciation


Project 3 Land or real assets investments


Project 4 Diary factory that incur agricultural costs


Project 5 Car Loan


Project 6 Stock


Project 7 Trucks Depreciation


Project 8 Construction projects


0.10865030333732562 6.3088234267993482E-2 0.11326357684480115 0.12328333077501186 0.11121604343002223 0.10000000000000009 0.15257139008454979 0.1140642023834566


IRR


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