The Investment Detective

THE INVESTMENT DETECTIVE

Teaching Note

Synopsis and Objectives

Suggestions for complementary cases on measures of investment attractiveness: “Fonderia di Torino,” (UVA-F-1350); on ranking problems: “Victoria Chemicals (B),” (Case 23), Euroland Foods S.A., (Case 24)

This case presents the cash flows of eight unidentified investments, all of equal initial investment size. The student’s task is to rank the projects. The first objective of the case is to motivate students to examine critically the principal capital-budgeting criteria. A second objective is to have students consider the problem that arises when net present value (NPV) and internal rate of return (IRR) disagree as to the ranking of two mutually exclusive projects. Finally, the case is a vehicle for introducing the problem created by attempting to rank projects of unequal life and the solution to that difficulty—the equivalent-annuity criterion.

Suggested Questions for Advance Assignment to Students

The case is self-explanatory and can be used without the benefit of additional study questions.

Supporting Spreadsheet Files

For students: Case_17.xls

For instructors: TN_17.xls

Please do not share the instructor’s spreadsheet file with the students.

Hypothetical Teaching Plan

The following teaching plan is designed for an 80-minute class:

1. Before doing any calculations, can we rank the projects simply by inspecting the cash flows?

2. What analytical criteria can we use to rank the projects? How do you define each criterion? Put the numbers up on the board.

3. Which of the two projects, 7 or 8, is more attractive? How sensitive is our ranking to the use of high discount rates? Why do NPV and IRR disagree?

4. What rank should we assign to each project? Why do payback and NPV not agree completely? Why do average return on investment and NPV not agree completely? Which criterion is best?

5. Are those projects comparable on the basis of NPV? Because the projects have...