REPORT THE INVESTMENT DETECTIVE
MBA CCE 48 - SYNDICATE 4 : Bonfry NCN Nuze – NIM 29112437 Daniel Yobs Purba – NIM 29112441 Tunjung Larasati – NIM 29112518 Widyawan Widarto – NIM 29112509 Akhmad M Arifin – NIM 29111145
I. Objective Assessing capital-budgeting over eight projects quantitatively. The four best projects will be invested by the firm capital. II. Analysis All projects will require same initial investment on $2 mil. and assumed to have the same risk class. Firm’s weighted average cost of capital has never been estimated. Appropriate discount rate has assumed to be 10 percent. Using data from Exhibit 1. We will analyze every project using Simple cash flow, PBP, NPV, and IRR method. Exhibit 1. Projects’ Free Cash Flow (in thousand dollars) 1
Project number: Initial investment Year
2
($2,000.00)
3
($2,000.00)
4
($2,000.00)
5
($2,000.00)
6
($2,000.00)
7
($2,000.00)
8
($2,000.00)
($2,000.00)
1 $
330.00
$
1,666.00
$
160.00
$
280.00
$
1,200.00
$
(350.00)
2 $
330.00
$
334.00
$
200.00
$
280.00
$
900.00
$
(60.00)
3 $
330.00
$
165.00
$
350.00
$
280.00
$
300.00
$
60.00
4 $
330.00
$
395.00
$
280.00
$
90.00
$
350.00
5 $
330.00
$
432.00
$
280.00
$
70.00
$
700.00
6 $
330.00
$
440.00
$
280.00
$
1,200.00
7 $
330.00
$
442.00
$
280.00
$
2,250.00
8 $
1,000.00
$
444.00
$
280.00
9
$
446.00
$
280.00
10
$
448.00
$
280.00
11
$
450.00
$
280.00
12
$
451.00
$
280.00
13
$
451.00
$
280.00
14
$
452.00
$
280.00
$
(2,000.00) $
280.00
15
$
10,000.00
$
2,200.00
Simple cash flow method is just considering the excess cash flow as criteria for assessing every projects. Payback period (PBP) is period of time required until cash inflow could repay the sum of original investment. Net present value (NPV) is the sum of the present values (PVs) of individual cash inflow of the same entity. Internal rate return (IRR) is a rate of return to measure the profitability of investments. With simple cash flow method we will get results as shown in Exhibit 2. The highest project rank would be the biggest excess cash flow which is Project 3, which is quite obvious. Exhibit 2. Simple cash flow method results Excess of Cash Flow (thousand of $)
Project Number
Rank 1 2 3 4 5 6 7 8
3 5 8 4 1 7 6 2
$8,000 $2,200 $2,150 $1,561 $1,310 $560 $200 $165
Payback period method (quantitatively) will results as shown in Exhibit 3. The highest rank would be the fastest payback period, which is project number 6. Project number 6 simply paid the investment less than a year. PBP is the simplest method searching for the best investment scheme. Exhibit 3. PBP method results Project Number
Rank 1 2 3 4 5 6 7 8
PBP (years) 6 7 2 4 8 1 5 3
0.91 1.89 2 6.05 6.04 6.06 7.14 14.2
NPV method results in a calculation as shown in Exhibit 4. With discounted rate of 10%, NPV for 15 years will give us project number 3 as the highest rank. This is because time value of money, so money in the future will have different value (usually lower). The net present value of the money then subtracted with the investment made. This method is better than the last method because it adds the time value of money.
Exhibit 4. NPV method results Project Number
Rank 1 2 3 4 5 6 7 8
NPV 3 4 8 5 7 1 6 2
$393.92 $228.22 $182.98 $129.70 $165.04 $73.09 $0.00 ($85.45)
IRR method results in a calculation as shown in Exhibit 5. We found that project number 7 have the highest IRR. This is the most profitable investment in case of IRR method. IRR method also consider the time value of money. Exhibit 5. IRR method results Project Number
Rank
IRR
1 2
7 4
15.26% 12.33%
3 4 5 6 7 8
5 3 8 1 6 2
11.12% 11.33% 11.41% 10.87% 10.00% 6.31%
If we compare with real investment projects, the first project might be obligations (government or private) where on the last year the company sell their obligations and get $1000. The second and seventh might be government projects, which give big cash inflow at the first year. The third might be deposit savings, gold investments, or stocks and collected on the last year. The fourth might be the company itself rent a space or place and could charge more because its not diminishing in the value. The fifth project might be machinery rent, where they couldn’t rise the price because machinery are degrading in useful life and value. The sixth project might be a one year deposit, and the eight project might be starting a new business division, but at the eight year they sold the business division. III. Conclusion Four methods are used to rank projects.
