967 words - 4 pages

Peninah Machaga

The Investment Detective

Financial Administration

FINC 5713-180

DR Roy Patin

Fall 2013

10/22/2013.

The Investment detective.

The case is basically discussing the importance of Capital Budgeting and resource allocation. Capital budgeting is the whole process of analyzing projects and deciding which ones to accept and thus include in the capital budget. It is important for a company to evaluate proposed projects accurately because there are delicate issues that can obscure the best investment issues. Analyzing project proposals require skills, effort and time therefore, analyst should be in a position to know what quantitative analysis he is to generate.

Required

To Rank the ...view middle of the document...

There are various quantitative measures which are used to screen projects and to decide which one to accept or reject. These are

* Net Present Value (NPV)

* Internal Rate of Return (IRR)

* Modified Internal Rate of Return (MIRR)

* Profitability Index

* Regular Payback

* Discounted Payment

However most companies use the NPV method and IRR.

The Net Present Value (NPV)

NPV is the present value of project’s expected cash flow including its initial cost discounted at the appropriate risk-adjusted rate.

The formula for finding the NPV is as follows

NPV=CF0+ CF1/ (1+r) + CF2/ (1+r) 2 +…..CFN/ (1+r) N

= -$2000+ $330/ (1.1)1 + 330/ (1.1)2+……$330/ (1.1)7

However it’s good to use a shorter way in calculating the NPV through the use of Excel’s NPV function.

Internal Rate of Return

This is the discount rate that forces the present value of the expected cash flow to equal the initial cash flow. It simply forces the NPV to equal zero. It is helpful in evaluation because it is an estimate of the project’s rate of return. If the return exceed the initial cost of capital, it is beneficial to the firm’s stakeholders. If it is less, it is not good to the stockholders.

The formula for calculating IRR

NPV=CF0 + CF1/ (1+IRR) + CF2/(1+IRR)2……CFN/(1+IRR)2

I used the Excel to calculate the NPV and IRR and then by the use of the table below I show the results of my calculations.

Project | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 |

Initial Investment | $2000 | $2000 | $2000 | $2000 | $2000 | $2000 | $2000 | $2000 |

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 | 350 |

4 | $330 | | | 395 | $280 | | 90 | 700 |

5 | $330 | | | 432 | $280 | | 70 | 1,200 |

6 | $330 | | | 440* | $280 | | | $2,250* |

7 | $330* | | | 442 | $280 | | | |

8 | $1000 | | | 444 | $280* | | | |

9 | | | ...

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