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Nindy
Case Report: The Investment Detective
Year Project 1 Project Project Project Project Project Project Project 8
2 3 4 5 6 7
Initial -2,000 -2,000 -2,000 -2,000 -2,000 -2,000 -2,000 -2,000
investment
1 330 1,666 160 280 2,200* 1,200 -350
2 330 334* 200 280 900* -60
3 330 165 350 280 300 60
4 330 395 280 90 350
5 330 432 280 70 700
6 330 440* 280 1,200
7 330* 442 280 2,250*
8 1,000 444 280*
9 446 280
10 448 280
11 450 280
12 451 280
13 451 280
14 452 280
15 10,000* -2,000 280
Sum of
cash flows 3,310 2,165 10,000 3,561 4,200 2,200 2,560 4,150
benefits
Excess of
cash flow
over initial 1,310 165 8,000 1,561 2,200 200 560 2,150
investment

1. We could blindly rank the projects by simple inspection of the cash flow, which are
by looking at the pay back period time and excess of cash flow.
Project 1 Project 2 Project 3 Project 4 Project 5 Project 6 Project 7 Project 8
Excess of cash flow
over initial 1310 165 8000 1561 2200 200 560 2150
investment
Rank 5 8 1 4 2 7 6 3
Payback period 7 2 15 6 8 1 2 7
Rank 5 2 8 4 7 1 2 5

Ranking by looking at the excess of cash flow, the preferable investment would be
project 3 and by payback period, the preferable investment would be project 6.
However, by using these methods we simply neglecting the time values of money
and the companies cost of capital. We use capital budgeting tools to measure
financial performance of projects. The major available tools are NPV, IRR, PI and
others. 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.
2. Criteria that might be used to rank the projects are NPV, PI, IRR and MIRR. We
were still in doubt which method is the best because the theoretical and practical
 strengths of the approaches differ. We would use both NPV and IRR as the best
method looking from the theoretical and practical view.
One of the reason why we still in doubt which one is the better method because of
mutually exclusive between project 7 and 8. For project 7 and 8 that mutually
exclusive, the company could have some difficulties deciding depend on the cost of
capital and NPV, as in figure below

$3,000.00 Project 7&8

$2,000.00

$1,000.00

$0.00
0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% 22% 24% 26% 28% 30%
-$1,000.00

-$2,000.00
Project 7 Project 8

The IRR of project 7 is greater than the IRR of project 8, so managers using the
IRR method to rank projects will always choose 7 over 8
The NPV of project 7 is sometimes higher and sometimes lower than the NPV of
project 8; thus, the NPV method will not consistently rank project 7 above project
8 or vice versa. The NPV ranking will depend on the firms cost of capital.
When the cost of capital is approximately 10%, projects 7 & 8 have identical
NPVs.
3. Ranking by quantitative methods
Period Table Value Project 1 Project 2 Project 3 Project 4 Project 5 Project 6 Project 7 Project 8
0 -2,000.00 -2,000.00 -2,000.00 -2,000.00 -2,000.00 -2,000.00 -2,000.00 -2,000.00
1 0.9091 300.00 1,514.55 145.45 254.55 2,000.00 1,090.91 -318.18
2 0.8264 272.73 276.03 165.29 231.40 743.80 -49.59
3 0.7513 247.93 123.97 262.96 210.37 225.39 45.08
4 0.6830 225.39 269.79 191.24 61.47 239.05
5 0.6209 204.90 268.24 173.86 43.46 434.64
6 0.5645 186.28 248.37 158.05 677.37
7 0.5132 169.34 226.82 143.68 1,154.61
NPV 8 0.4665 466.51 207.13 130.62
9 0.4241 189.15 118.75
10 0.3855 172.72 107.95
11 0.3505 157.72 98.14
12 0.3186 143.70 89.22
13 0.2897 130.64 81.11
14 0.2633 119.03 73.73
15 0.2394 2,393.92 -478.78 67.03
PV 2,073.09 1,914.55 2,393.92 2,228.22 2,129.70 2,000.00 2,165.04 2,182.98
NPV 73.09 -85.45 393.92 228.22 129.70 - 165.04 182.98
Rank 6 8 1 2 5 7 4 3
Profitability Index 3.65% -4.27% 19.70% 9.21% 6.49% 0.00% 8.25% 7.73%
Rank 6 8 1 2 5 7 3 4
IRR 10.87% 6.31% 123.61% 12.33% 11.12% 10.00% 15.26% 11.41%
Rank 6 8 1 3 5 7 2 4
 The rank using quantitative methods differ from the ranking by simple inspection
of cash flow. This is happened because the ranking using quantitative methods take
value of money and discount rate into account. By using quantitative methods, we
recommend the company to invest on project 3, 4, 7 and 8.
4. Real investment projects that have similar cash flow:
Project 1 Leasing or Partially Amortizing Bond
Project 2 Advertising campaign
Project 3 Zero-Coupon Bond
Project 4 Nuclear-power plant
Project 5 Leasing with 0 terminal value or Home mortgage
Project 6 One-year bond
Project 7 Mine
Project 8 Orchard