The Investment Detective

The Investment Detective 1. Can you rank the project simply by inspecting the cash flow?

1) Project Ranking based on simple inspection of cash flows: Rank Project No Net Cash Flow($) 1 3 8000 2 5 2200 3 8 2150 4 4 1561 5 1 1310 6 7 560 7 6 200 8 2 165

As per net cash flow priority has been indicated above. But cash flow does not consider time value of money. So it is not good measure for rank different investment.

2. What criterion might you use to rank the projects? Which quantitative ranking methods are better? Why? Different quantitative methods are  Net Present Value  Internal rate of return  Payback period  Discounted payback period  Profitability Index

NPV:

IRR:

1) Project Ranking based on IRR: Rank 1 2 3 4 5 6 7 8

Project No 7 4 8 3 5 1 6 2

IRR 15% 12.33% 11.41% 11.33% 11.12% 10.87% 10% 6.31%

Payback Period: 1) Project Ranking based on Pay Back Period:

Rank

Project No 1 2 3 4 5 6 7 8

6 7 2 8 4 1 5 3

Pay Back Period 0.91 1.88 2 6.04 6.05 6.06 7.14 15

Discounted Payback Period:

Project Ranking based on Discounted Pay Back Period: Discounted Ran Pay back k Project no. period 1 6 1 2 7 2.73 3 8 6.84 4 1 7.84 5 4 9.1 6 5 13.16 7 3 14.83 8 2 -

Profitability Index: Project Ranking based on Profitibility Index: Ran Profitibility k Project no. Index 1 3 19.7 2 4 11.41 3 8 9.15 4 7 8.25 5 5 6.49 6 1 3.65 7 6 0 8 2 -4.27

Out of above method the most acceptable method is NPV as it is based on time value of money. NPV 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.

3. What is the ranking you found by using quantitative methods? Does this ranking differ from the ranking obtained by simple inspection of the cash flows?

4. What kinds of real investment projects have cash flows similar to those in Exhibit 1? Project Project Project Project Project Project Project Project

1 2 3 4 5 6 7 8

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