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Individual Assignment FIN 101
Investment Detective
The Four Projects in which we should invest are Project 3,4,8 and 7
1.
We can't rank the projects by only simply inspection of cash flows because of time value of money and cost of companies. A dollar earned in now would be more valuable than a dollar received in near future.
2.
Various criteria which can be used to rank projects are
1.
Net Present Value, or NPV
2.
Internal Rate of Return, or IRR
3.
Payback Period
4.
Profitability Index
NPV results in the best ranking. IRR's major limitation is it uses one single discount single discount rate to evaluate every investment. Without modification, IRR does not account for changing discount rates, so it's just not adequate for longer-term projects with discount rates that are expected to vary. Payback period ignores the time value of money. Profitability Index is a ratio , it ignores the scale of investment and provides no indication of the size of the actual cash flows.
3. Project
1
2
3
4
5
NPV
73.09
85.45
6
393.92
228.22
129.70
IRR
10.87%
6.31%
11.33%
12.33%
11.12%
Profitability
3.65%
-4.27%
19.70%
9.21%
6.49%
7
2
15
7
8
165.04
259.96
10.00%
15.26%
11.96%
0.00%
8.25%
10.98%
-
Index
Payback
6
8
1
2
7
6th 7 2,560
7th 6 2,200
Rank from Simple Inspection of Cash Flow Rank Project Cash Flows
1st 3 10,000
2nd 5 4,200
3rd 8 4,150
4th 4 3,561
5th 1 3,310
8th 2 2,165
From Simple cash flow it looks like Project 3 , 5 , 8 and 4 are most profitable. However different quantitative methods have different results. The Four Projects in which we should invest are Project 3,4,8 and 7
4. Project 1
Coupon Bonds - where you get periodic coupon payments.
Project 2
Machine Depreciation
Project 3
Pure Discount Bond (Zero Coupon Bond) - You receive cash at the end of maturity.
Project 4
Investment in a machinery/Factory which generates cash for a certain period of time and then bears a cost at the end.
