Investment Detective

Subject: | Investment Detective Analysis |

Analysis Process

We cannot rank the projects by simply inspecting the cash flows. We must bring all cash flows at the same point in time (present) before comparing. This is because of time value of money. A dollar received now is more valuable than a dollar received sometime in the future. Thus, it is important that we bring all the cash flows to the present time before comparing.

Several evaluation methods used during the course of this analysis, including the attached excel spreadsheet, which consisted of the following:

* Payback Method

* Measure of the expected time before the initial investment will be recovered. Accept the project if payback is faster than the targeted payback. This method ignores the time value of the cash flows and their riskiness.

* Internal Rate of Return

* An investment project will be acceptable if IRR is greater than or equal to the required rate of return for that project. The higher the IRR, the better.

n CFt

IRR: 0 = --------------

t = 0 (1 + IRR)t

* Net Present Value

* NPV greater than or equal to zero indicates an acceptable project that at least earns the firm’s required rate of return. For ranking projects, the project with the highest NPV is preferred since it has the highest value.

n CFt

NPV = ------------

t = 0 (1 + r)t

Project assumptions based on figures provided

Based upon the figure it appears as though the Projects would fall within the areas described below:

Project 1 is similar to an investment in a coupon bond, where you get coupon payments periodically at the end of the period you get the principle.

Projects 2, 4, 7 and 8 are like an investment in a machinery, which generates positive cash for you for a certain period of time. After a while, you can sell that off and receive some more cash.

Project 3 is similar to a zero coupon bond where you purchase the bond at a...