Individual Assignment

FIN 101

Investment Detective

The Four Projects in which we should invest are Project 3,4,8 and 7

1. We can't rank the projects by only simply inspection of cash flows because of time
value of money and cost of companies. A dollar earned in now would be more
valuable than a dollar received in near future.





2. Various criteria which can be used to rank projects are
1. Net Present Value, or NPV
2. Internal Rate of Return, or IRR
3. Payback Period
4. Profitability Index



NPV results in the best ranking. IRR's major limitation is it uses one single discount
rate to evaluate every investment. Without modification, IRR does not account for changing
discount rates, so it's just not adequate for longer-term projects with discount rates that are
expected to vary. Payback period ignores the time value of money. Profitability Index is a
ratio , it ignores the scale of investment and provides no indication of the size of the actual
cash flows.





3.
Project 1 2 3 4 5 6 7 8
NPV

73.09
-
85.45

393.92 228.22

129.70 -

165.04 259.96

IRR 10.87% 6.31% 11.33% 12.33% 11.12% 10.00% 15.26% 11.96%

Profitability 3.65% -4.27% 19.70% 9.21% 6.49% 0.00% 8.25% 10.98%
Index

Payback

7

2

15 6

8 1

2 7

Rank from Simple Inspection of Cash Flow
Rank 1st 2nd 3rd 4th 5th 6th 7th 8th
Project 3 5 8 4 1 7 6 2
Cash Flows 10,000 4,200 4,150 3,561 3,310 2,560 2,200 2,165
From Simple cash flow it looks like Project 3 , 5 , 8 and 4 are most profitable. However
different quantitative methods have different results.
The Four Projects in which we should invest are Project 3,4,8 and 7


4.
Project 1 Coupon Bonds - where you get periodic coupon payments.
Project 2 Machine Depreciation
Project 3 Pure Discount Bond (Zero Coupon Bond) - You receive cash at the end of
maturity.
Project 4 Investment in a machinery/Factory which generates cash for a certain period of
time and then bears a cost at the end.
Project 5 Loan/EMI
Project 6 One-year bond
Project 7 Machine Depreciation (Similar to Project2)
Project 8 New Business