Investment detective

8 August 2016

However, the rank simply inspected by the cash flows is not the best method to evaluate the projects. Because this method does not consider time period, WACC, Net present value and other factors. All the factors could affect the value of project. 2. To evaluate the investment projects, we can use 5 main methods, NPV, IRR, MIRR, payback and discount payback. Each method has different advantage to evaluate the investment projects. It is better to use NPV and MIRR methods to evaluate the projects. NPV can provide basic accurate methods to use time value of money to estimate investments.

Decision makers and investors are very interesting with this rate. But MIRR is better than IRR because MIRR will includes both reinvestment rate and WACC. IRR Normal: Rank 1 2 3 4 5 6 7 8 Project number 7 4 8 3 5 1 6 2 IRR 15. 26% 12. 33% 11. 41% 11. 33% 11. 12% 10. 87% 10. 00% 6. 31% IRR Reinvestment: Rank 1 2 3 4 5 6 7 8 Project number 3 7 8 4 5 1 6 2 NPV $393. 92 $331. 15 $276. 88 $228. 22 $129. 70 $107. 18 $0. 00 -$261. 36 MRR Normal: Rank 1 2 3 4 5 6 7 8 Project number 7 3 8 4 1 5 6 2 MIRR 11. 76% 11. 33% 11. 18% 10. 65% 10. 49% 10. 46% 10. 00% 8. 41% MIRR Reinvestment: Rank 1 2 3 4 5 5 6 7

Investment detective Essay Example

Project number 3 8 4 7 2 5 1 6 MIRR 11. 33% 10. 81% 10. 65% 10. 59% 9. 66% 10. 46% 10. 29% 10. 00% Besides, payback and discount payback methods can also be used. These methods can provide very important information about risk and liquidity. The shorter the payback is, the higher the project’s liquidity will be. But there are not the best methods to estimate. Regular Payback for Normal Investment Rank 1 2 3 4 5 6 7 8 Project number 6 7 2 8 4 1 5 3 Payback -0. 29 1. 89 2 6. 04 6. 05 6. 06 7. 14 14. 2 Regular Payback for Reinvestment Rank 1 2 3 4 5 6 7 8 Project number 6 7 2 8 4 1 5 3 Payback 10 1. 89 4. 51

The Discount Payback method is in the following Appendix. 4. Project 1 is very similar with amortizing fix-rate bond. The current price of the bond is $2,000,000. Also, it has constant PMT as $330,000 and par value as $1,000,000. For project 2, the cash inflow is only for three years and the annual cash inflows are decreased. It could be advertising campaign, because the annual rate of return of advertising gets lower. Project 3 is very similar with the Mortgage investment. People bought a house that costs $2,000,000, and the householder sells it for $10,000,000 after 15 years.

Project 4 could be investment on an environmental unfriendly factory. After the factory stop working, it needs to spend money to clean up the materials that threats the environment. Therefore, it will generate money for 14 years, and loss exactly the same amount as its initial investment. The project 5 can be a long-term loan. The financial instrument lends the money to individual with a constant interest rate. Project 6 could be stock with 10% interest rate. The trend of cash flow in project eight is similar with the investment in a well running and start-up company.

The cash flow is negative in the first few years. The net income increases with good operation and management in the following years. Therefore, the cash flow becomes positive. Project 7 could be an investment on a consumer goods factory. It will generate more cash when the products just come into the market. But cash flow will go down if the company does not launch new products. Project 8 will be high technology company, like apple. It will lose money at the beginning of the investment because not a lot of people know about it. Also, not all the people can afford to buy it.

After a while, more people recognize it; therefore, company will suddenly generate more money. Project# 1 2 3 4 5 6 7 8 Real investment project Amortizing fix-rate bond Advertising campaign Real estate investment Environmental unfriendly factories Long-term loan Stock Consumer goods factory High Technology company 5. I would like to select project 3, 4, 5, and 7 as the top 4 investment projects. Project 3 is the most attractive investment project for investors. The NPV of project 3 is $393,920,000. It is the highest NPV among the 8 projects.

Also, the MIRR of project 3 is very high. But project 3 high risk and low liquidity. However, we only consider the quantitative factors to evaluate these projects. Therefore I select project 3 as my first choice to invest. In addition, project 7 and 8 are mutually exclusive. Also, both of them have a good performance in cash flow. According to the rank and data in exhibits, I choose to invest project seven rather than the project eight because project 7 has a higher MIRR than that of project 8. Also, the payback period for project 7 is lower than the payback period for project 8.

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