Investment Detective

3. Case Ananlysis

* Payback Period Method

Given in the table, year in which payback was accomplished.

Project | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 |

Payback Period (year) | 7 | 2 | 15 | 6 | 8 | 1 | 2 | 7 |

Because the payback year in project 1 & 8 and 2 & 7 are similar, we must count more specific (to rank the payback period in each project)

* Project 1:

Payback Period = 6 year + $(2000-1980)$330 year = in 6.06th year

* Project 8:

Payback Period = 6 year + $(2000-1900)$2250 year = in 6.04th year

* Project 2:

Payback Period = 1 year + $(2000-1666)334 year = in year 2nd year

* Project 7:

Payback Period = 1 year + $(2000-1200)$900 year = in 1,89th year

Payback period ranking (from the shortest period to the longest):

Ranking | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 |

Project | 6 | 7 | 2 | 4 | 8 | 1 | 5 | 3 |

* Net Present Value Method and Internal Rate of Return Method

NPV=(t=1nCFt(1+r)2)- CFo

0=(t=1nCFt(1+IRR)2)- CFo

Discount rate = 10%

* Project 1 (manual):

NPV10% = 3300.1 x 1-11.17+10001.18- 2000 = 73.08559

NPV12% = 3300.12 x 1- 11.127)+10001.128- 2000= -90.0771

-90.07

0

12%

IRR

10%

73.08

-90.07

0

12%

IRR

10%

73.08

using triangle equation

12%-IRR1 2%-10%= 0-(-90.07)73.08-(-90.07)

IRR = 10.87 % per year

NPV ranking (from highest to lowest)

Rank | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 |

Project | 3 | 4 | 8 | 7 | 5 | 1 | 6 | 2 |

The 6th project’s NPV is $0

The 2nd project’s NPV is less than $0 (-$ 85.45)

IRR ranking (from highest to the lowest)

Rank | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 |

Project | 7 | 4 | 8 | 3 | 5 | 1 | 6 | 2 |

The 2nd project’s IRR is less than the cost of capital (6.31% less than 10%)

* Profitability Index

PI= PV of Future Cash FlowsInitial Invesment

* Project 1

Profitability Index =...