THe investment Detective
The investment detective
1. We can not 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 major available tools are IRR, MIRR and NPV. By using these tools we can conclude whether sum of the cash flows of a project exceeds expected return rate or cost of capital of a company or not.
Also there are qualitative factors that should be considered. A project can be critical for the company and even it has negative NPV, it could be accepted.
Also a company would prefer to have small experiments to identify possible profitable businesses before making a heavy investment to enter the market. In this case quantitative methods would not be enough to analyze the project.
Because most of the cash flows are estimated in most of the projects, quality of estimation is another factor to be considered besides numerical capital budgeting tool results.
2. I would use NPV since it is superior compared with IRR. I would also use profitability index. I would use also MIRR to enable easy communication among non-financial managers in the company by giving them a percentage score to evaluate projects. Finally I would calculate pay back information.
3. Project analysis
Project # 1 2 3 4 5 6 7 8
NPV 73.09 -85.45 393.92 707.01 129.70 0.00 165.04 182.98
PI 1.037 0.957 1.197 1.285 1.065 1.000 1.083 1.077
MIRR 10.49% 8.41% 11.33% 11.86% 10.46% 10.00% 11.76% 11.18%
Payback 6.06 2.00 14.20 6.05 7.14 0.90 1.88 6.08
Ranking with NPV
Project # 2 6 1 5 7 8 3 4
NPV -85.45 0.00 73.09 129.70 165.04 182.98 393.92 707.01
PI 0.957 1.000 1.037 1.065 1.083 1.077 1.197 1.285
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