Syndicate 6

Alex Justianto 29113332

Dwi Aprilia 29113338
Denia Fadila 29113368
Talitha Marcia Farid 29113382
Delfi Kusumawardhani 29113545

Executive Summary
The investment decision should be based on how much profit or excess of cash flow
we get when comparing the cash flow and the initial investment. To solve that
problem, we have to use the essence of capital budgeting and resource allocation.
Therefore, while we have several options of project, the project with highest NVP
should be chosen.

Objective
For this assignment, we only consider quantitative things. All projects have the same
initial investments, but different cash flow. By using financial calculation, we want to
search which project provides highest return.

1 2 3 4 5 6 7 8
($2,000) ($2,000) ($2,000) ($2,000) ($2,000) ($2,000) ($2,000) ($2,000)
Year 1 $330 $1,666 $0 $160 $280 $2,200 $1,200 ($350)
2 $330 $334 $0 $200 $280 $0 $900 ($60)
3 $330 $165 $0 $350 $280 $0 $300 $60
4 $330 $0 $395 $280 $0 $90 $350
5 $330 $0 $432 $280 $0 $70 $700
6 $330 $0 $440 $280 $0 $1,200
7 $330 $0 $442 $280 $0 $2,250
8 $1,000 $0 $444 $280 $0
9 $0 $446 $280 $0
10 $0 $448 $280 $0
11 $0 $450 $280 $0
12 $0 $451 $280 $0
13 $0 $451 $280 $0
14 $0 $452 $280 $0
15 $10,000 ($2,000) $280 $0
$3,310 $2,165 $10,000 $3,561 $4,200 $2,200 $2,560 $4,150
$1,310 $165 $8,000 $1,561 $2,200 $200 $560 $2,150
Sum of Cash Flow benefits
Project Number
Initial Investment
Excess of Cash Flow over
Initial Investment
Project's Free Cash Flow ($ 000)
1. Can you rank the projects simply by inspecting the cash flows?
it is possible to rank the projects according to their cash flows, but it will not be close to a
full-proof analysis. Taking a projects cash flow into consideration really only gives a
detective a glimpse of the excess cash flow a company can profit from over their initial
investment.
The firm stated in the case that it assumed a ten percent discount rate, so taking a look at
the cash flows could help narrow their decision down if they are looking for a return of ten
or greater.
Ultimately, however, simply analyzing the cash flows does not take into account the time
value of money and should not be used as a direct decision maker as different firms are
going to have different needs for cash-on-hand. Taking this into consideration, then, we
feel the best cash flows, from best to worst, would be: 3, 5, 8, 4, 1, 7, 6 and 2. This choice
was made by seeing which projects had the greatest excess of cash flow over their initial
investment.

1 2 3 4 5 6 7 8
Year 0 ($2,000) ($2,000) ($2,000) ($2,000) ($2,000) ($2,000) ($2,000) ($2,000)
1 ($1,670) ($334) ($2,000) ($1,840) ($1,720) $200 ($800) ($2,350)
2 ($1,340) $0 ($2,000) ($1,640) ($1,440) $100 ($2,410)
3 ($1,010) ($2,000) ($1,290) ($1,160) ($2,350)
4 ($680) ($2,000) ($895) ($880) ($2,000)
5 ($350) ($2,000) ($463) ($600) ($1,300)
6 ($20) ($2,000) ($23) ($320) ($100)
7 $310 ($2,000) $419 ($40) $2,150
8 ($2,000) $240
9 ($2,000)
10 ($2,000)
11 ($2,000)
12 ($2,000)
13 ($2,000)
14 ($2,000)
15 $8,000
Cumulative Cas Flow
Project Number
There are a few criteria that one could use to rank the projects beyond the simplistic
analysis mentioned. These approaches include the payback period, discounted payback
period, net present value, internal rate of return, and the profitability index.
The payback period does not take the time value of money into consideration and both the
payback period and discounted payback method ignore cash flows after the original
investment has been paid off.
The IRR method yields very similar results in comparison to using an investments NPV
but has a few cons such as possible multiple rates of returns, changes in discount rates,
and IRRs inability to be added together.
Lastly, the Profitability Index and NPV methods yield very similar results as well, but the PI
method is utilized as a ratio. Although they are very similar, given the research our group
has conducted we feel that the NPV is the most popular method used by firms due to its
simplicity and consideration of the time value of money and, due to this, would be the
approach we would recommend most.
1 2 3 4 5 6 7 8
10% 10% 10% 10% 10% 10% 10% 10%
73.09 (85.45) 393.92 228.22 129.70 0.00 165.04 182.98
10.87% 6.31% 11.33% 12.33% 11.12% 10.00% 15.26% 11.41%
6.061 2.000 14.200 6.052 7.143 0.909 1.889 6.044
7.843 9.097 13.150 1.000 2.733 6.842
41.38% 72.17% 66.67% 23.74% 28.00% 220.00% 51.20% 59.29%
1.04 0.96 1.20 1.11 1.06 1.00 1.08 1.09
Quantitive Ranking Methods
Discount Rate
Project Number
Profitability Index
Discounted Payback Period (yr)
Payback Period (yr)
Average Accounting Return
IRR
NPV ($)
The adjusted rankings from best to
worst would be:
Payback 6, 7, 2, 8, 4, 1, 5, 3
PI 3, 4, 8, 7, 5, 1, 6, 2
NPV 3, 4, 8, 7, 5, 1, 6, 2

Our original, simple cash flow analysis
was - 3, 5, 8, 4, 1, 7, 6, 2. As one can
see, a few of the results match up, but
for the most part the PI and NPV
method appear to be much more
accurate

Project Payback Profitability Index NPV
1 6.06 1.04 73.09
2 2.00 0.95 -85.46
3 14.20 1.19 393.92
4 6.05 1.11 228.22
5 7.14 1.06 129.70
6 0.90 1.00 0.00
7 1.90 1.08 165.04
8 6.04 1.09 182.98
Project Number
1
2
3
4
5
6
7
8
Real Investment Project With Similar Cash Flow
Machine Depreciation (similar with Project 2), Project of Oil Rig
Start-Up Business Investment on Farming and Harvesting
Signing Bonus at the same amount every year, Bond
Machine Depreciation, Ads Campaign
Zero Coupon Bond
Recycling Factory With Environmental Cost
Car Loan, Mortgage
Newly Issued Stocks, One Year Bond
Real Investment
Conclusion
Most of people consider more to NPV as their consideration in running a project. The
higher the NPV, the better the project is. So, for the people like that, investing in Zero
Coupon Bond will be more beneficial. But considering the late payback period, the
zero coupon bond is the worst option, because the money can be taken in the end of
investment period

Recommendation
In the country with the high level of inflation, it is better to choose the project with high
IRR, such as project 7 and 4, because the NPV generated will still positive until 12%
(project 4) / 15% (project 7)