Aldila Citra Aulia 29319040

Syndicate 2 Dina Sonyah

Jibril Dwi Puja Utama Dewantara
29319155
29319176
CASE: INVESTMENT DETECTIVE Martin Indrawan 29319153
Ria Angelia Wibisono 29319154

DATA
Projects Free Cash Flow

Projects # 1 2 3 4 5 6 7 8
Initial Investment ( (2,000) ( (2,000) ( (2,000) ( (2,000) ( (2,000) ( (2,000) ( (2,000) ( (2,000)
Year
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 Cash Flow ( 3,310) ( 2,165) ( 10,000) ( 3,561) ( 4,200) ( 2,200) ( 2,560) ( 4,150)
Excess Cash Flow ( 1,310) ( 165) ( 8,000) ( 1,561) ( 2,200) ( 200) ( 560) ( 2,150)
indicates year in which payback was accomplish

Discounted Rate 10%

Project7 and 8 mutually exclusive

ANSWER
Can you rank the project simply by inspecting the cash flow?
By those data, we only gather the total acxess cash flow from each projects, which one has the biggest excess cash
flow than the other. It doesn't take other requirements data to conclude the business investment decision such time
value of money and cost of capital. We can see that projects #3 has the biggest excess cash flows, but the return
appears only in 15 years. In the other side, projects #6 has a small amount of excess cash flows, but the return
appears in the first year. It is important to look the value of payback from every different timeline due to the money
in the 15 years might be different with the earlier year.
We can't rank the project only by inspecting cash flow

If we rank the projects based on cash flows, the rank from the highest to the lowest will be projects #3, 5, 8, 4, 1, 7, 6
and te last is 2

What criteria might you use to rank this project? Which quantitative method are better and why?
Some criteria to analyze the business investment are:
a. NPV (Net Present Value)
b. IRR (Internal Rate of Return)
c. PI (Profitability Index)
d. Payback Rule
Based on the formula of each methods, we can conclude as follows:
a. NPV calculate the difference between an investment's market value and its cost. Investment should be
considered only if the NPV is positive. This method can be the best to evaluate the projects
b. IRR is the discount rate that makes NPV of an investment zero. Only time when the investment should be
accepted is if IRR is higher than required return. Although IRR helps to rank the project, it doesn't conside the time
value of money and thus it should not be used as only measurement of a project
c. PI is calculated by dividing the present value of an investment's all future cash flows and divided by its initial
investment. PI is over 1.00 if the NPV is positive and vice versa. PI is correlated with NPV, but it may not be
accurate if looking at mutually exclusive investments
d. Payback rule is the time period of how long it will take to recover the initial investment. It's an easy method to
rank the projects, but it doesn't take into time value of money

Based on those, we conclude that NPV is the best method to calculate and rank the projects

What is the ranking you found by using quantitative method? Does this ranking differ from the ranking obtained
by simple inspection of the cash flows?
The calculation using each method for each projects are follows:
Method 1 2 3 4 5 6 7 8
NPV 73.09 (85.45) (2,000.00) (205.95) (506.22) (0.00) 165.04 182.98
IRR 11% 6% 400% 12% 11% 10% 15% 11%
PI 1.04 0.96 0.00 0.90 0.75 1.00 1.08 1.09
Payback Rule 7 2 15 7 8 1 2 7

Based on those calculations, the rank based on each method are:

Method 1 2 3 4 5 6 7 8
NPV 3 5 8 6 7 4 2 1
IRR 4 6 1 3 4 5 2 4
PI 3 5 8 6 7 4 2 1
Payback Rule 3 2 5 3 4 1 2 3
*red font considered not to invest

It's clearly show that the rank is different between inspection from cash flow than the fourth investment method.
Since we conclude that the best method to make a business investment decision, the conclusion of represent
projects are to invest on projects # 8, 7 and 1

What kind of real investment projects have cash lows similar with Exhibit 1?
Based on their cash flows, the real investment that have similar pattern with each projects are:
Project # Real Investment
1 Bond
2 Equipment depreciation
3 Land or Real Estate
4 Factory or Plant
5 Car Loan
6 Stock
7 Vehicle Depreciation
8 Construction Projects