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

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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