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Zeeshan Rafaqat

20110210
Investment Detective Analysis
Q1: Can you rank projects simply by inspecting the cash flows?
A: Cash flow inspection can give a general idea of whether the given project is worth considering or not,
however, cash flow inspection cannot help much with analyzing whether the project would actually be
beneficial or not and ranking the projects when the projects seem somewhat comparable based on cash
flow inspection. Ranking based on simple cash flow inspection would be 3,5,8,4, 1, 7, 6 and 2.

Q2: Which criteria might you use to rank the projects? Which quantitative ranking methods are
better? Why?
A: Some well known quantitative ranking methods are:

 NPV
 IRR
 Payback period and discounted payback period
 Profitability Index
NPV is relatively better than other methods because it gives results in monetary terms which are more
tangible and understandable, considering they are of the same nature as initial investment. A project may
have a high IRR but a low NPV, therefore it might not create enough value to be worth considering.
Discounted payback period is also quite useful; however, it mainly focuses on covering your initial costs
and does not take into effect the cash flows after payback period.

Q3: What is the ranking you found by using quantitative methods? Does this ranking differ from
the ranking obtained by simple inspection of the cash flows?
A: The ranking of the projects based on different quantitative methods is following:
NPV:

Project NPV
3 $393.92
4 $228.22
8 $182.98
7 $165.04
5 $129.70
1 $73.09
6 $0
2 $(85.45)

IRR:
Project IRR
7 15.26%
4 12.33%
8 11.41%
3 11.33%
5 11.12%
1 10.87%
6 10.0%
2 6.31%

Discounted Payback period:

Project Discounted Payback period


6 1.00
7 2.73
8 6.84
1 7.84
4 9.09
5 13.15
3 14.83
2 0.00

Ranking of the projects differ from the simple cash flow inspection and differ among
the quantitative methods as well. However, results from a certain quantitative
method can be used to supplement the results from other methods. I would
consider NPV ranking as more significant.
Q4: What kind of real investment projects have cash flows similar to those
in Exhibit 1?
A: Project 1: Installations with difference settling in the end.
Project 2: New season collection launch (of clothes etc.)
Project 3: Construction project
Project 4: Renting a building or land (end term negative cash flow may represent the
repayment of security charges)
Project 5: Insurance
Project 6: Large scale catering
Project 7: Replacing the old truck fleet for efficient supply and distribution. Wear and
tear over the years will reduce the efficiency and hence the cash flows associated
with it.
Project 8: Setting up of a new plant. It will have certain costs in the start, e.g. set up
and machinery installation costs, testing costs, but once running on full potential, it
will begin to generate positive cash flows.