...CASE STUDY The Investment Detective The essence of capital budgeting and resource allocation is a search for good investments in which to place the firm’s capital. The process can be simple when viewed in purely mechanical terms, but a number of subtle issues can obscure the best investment choices. The capital budgeting analyst is necessarily, therefore, a detective who must winnow good evidence from bad. Much of the challenges is knowing what quantitative analysis to generate in the first place. Supposed you are a new capital budgeting analyst for a company considering investments in the eight projects listed in Exhibit 1. The chief financial officer of your company has asked you to rank the projects and recommend the “four best” that the company should accept. Part I For the first part of this assignment only quantitative considerations are relevant. No other project characteristics are deciding factors in the selection, except that management has determined that projects 7 and 8 are mutually exclusive. All projects require the same initial investment, $2,000,000. Moreover, all are believed to be of the same risk class. The weighted average cost of capital for the first part is 10%. To simulate your analysis, consider the following questions: 1. Can you rank the projects simply by inspecting the cash flows? We cannot rank the projects by simply inspecting the cash flows. We must bring all cash flows at the same point in time (present) before...
Words: 876 - Pages: 4
...The Investment Detective 1. Can you rank the project simply by inspecting the cash flow? 1) Project Ranking based on simple inspection of cash flows: | | | | Rank | Project No | Net Cash Flow($) | 1 | 3 | 8000 | 2 | 5 | 2200 | 3 | 8 | 2150 | 4 | 4 | 1561 | 5 | 1 | 1310 | 6 | 7 | 560 | 7 | 6 | 200 | 8 | 2 | 165 | As per net cash flow priority has been indicated above. But cash flow does not consider time value of money. So it is not good measure for rank different investment. 2. What criterion might you use to rank the projects? Which quantitative ranking methods are better? Why? Different quantitative methods are * Net Present Value * Internal rate of return * Payback period * Discounted payback period * Profitability Index NPV: IRR: 1) Project Ranking based on IRR: | | | | | Rank | Project No | IRR | 1 | 7 | 15% | 2 | 4 | 12.33% | 3 | 8 | 11.41% | 4 | 3 | 11.33% | 5 | 5 | 11.12% | 6 | 1 | 10.87% | 7 | 6 | 10% | 8 | 2 | 6.31% | Payback Period: 1) Project Ranking based on Pay Back Period: | | | | Rank | Project No | Pay Back Period | 1 | 6 | 0.91 | 2 | 7 | 1.88 | 3 | 2 | 2 | 4 | 8 | 6.04 | 5 | 4 | 6.05 | 6 | 1 | 6.06 | 7 | 5 | 7.14 | 8 | 3 | 15 | Discounted Payback Period: Project Ranking based on Discounted Pay Back Period: | | | | | | | | Rank | Project no. | Discounted Pay back period | | | | | 1 | 6 | 1 | | | | | 2 | 7 | 2.73...
Words: 442 - Pages: 2
...The Investment Detective 1. Can you rank the projects simply by inspecting the cash flows? The company is able to perform initial ranking based on the cash flows overview, although it will not be sufficient to determine the true profitability. In this case the ranking of the projects is the following – 3, 5, 8, 4, 1, 7, 6 and 2. This ranking is supported by the excess of cash flows (CF). 2. What criteria might you use to rank the projects? Which quantitative ranking methods are better? Why? Based on the theory of the capital budgeting evaluation techniques, the investments consideration will be analyzed upon Net Present Value (NPV), Payback period and Internal Rate of Return (IRR). The concepts will support ranking from the greatest project to less attractive one. First criteria that is used for ranking is the NPV method. It is considered as the most useful method because it is based on Cash Flows of the projects throughout their entire period. Of course it incorporates the time value of money concept and represents net value of the projects or net benefit that accrues to the company. Ranking assessment will consider as acceptable investment only projects with positive NPV. The second criterion is the IRR evaluation method. It is also an alternative to NPV method. Basically IRR is a discount rate that equates the present value of project’s expected cash flows to the initial invested amount. The successful ranking criteria for the acceptable projects, is to have...
Words: 766 - Pages: 4
...For the exclusive use of S. YAN UV0072 Version 2.2 THE INVESTMENT DETECTIVE The essence of capital budgeting and resource allocation is a search for good investments in which to place the firm’s capital. The process can be simple when viewed in purely mechanical terms, but a number of subtle issues can obscure the best investment choices. The capital-budgeting analyst, therefore, is necessarily a detective who must winnow bad evidence from good. Much of the challenge is in knowing what quantitative analysis to generate in the first place. Suppose you are a new capital-budgeting analyst for a company considering investments in the eight projects listed in Exhibit 1. The chief financial officer of your company has asked you to rank the projects and recommend the “four best” that the company should accept. In this assignment, only the quantitative considerations are relevant. No other project characteristics are deciding factors in the selection, except that management has determined that projects 7 and 8 are mutually exclusive. All the projects require the same initial investment, $2 million. Moreover, all are believed to be of the same risk class. The firm’s weighted average cost of capital has never been estimated. In the past, analysts have simply assumed that 10% was an appropriate discount rate (although certain officers of the company have recently asserted that the discount rate should be much higher). To stimulate your analysis, consider the following questions: ...
Words: 560 - Pages: 3
...Bruner: Case Studies in Finance: Managing for Corporate Value Creation, 4/e IV. Capital Budgeting and Resource Allocation 17. The Investment Detective © The McGraw−Hill Companies, 2003 CASE 17 The Investment Detective The essence of capital budgeting and resource allocation is a search for good investments in which to place the firm’s capital. The process can be simple when viewed in purely mechanical terms, but a number of subtle issues can obscure the best investment choices. The capital-budgeting analyst is necessarily, therefore, a detective who must winnow good evidence from bad. Much of the challenge is knowing what quantitative analysis to generate in the first place. Suppose you are a new capital-budgeting analyst for a company considering investments in the eight projects listed in Exhibit 1. The chief financial officer of your company has asked you to rank the projects and recommend the “four best” that the company should accept. In this assignment, only the quantitative considerations are relevant. No other project characteristics are deciding factors in the selection, except that management has determined that projects 7 and 8 are mutually exclusive. All the projects require the same initial investment, $2 million. Moreover, all are believed to be of the same risk class. The weighted-average cost of capital of the firm has never been estimated. In the past, analysts have simply assumed that 10 percent was an appropriate discount rate (although certain...
Words: 644 - Pages: 3
...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 eight projects and recommend the four best that company should accept. Assumptions * All the projects require the same initial investment of $2million with an assumption that, they have same risk class. * Weighted average cost of capital has never been estimated. * Discount rate is 10% . However most companies use NPV and IRR The first step in project analysis is to estimate the cash flow. * It is possible to rank the project by simply inspecting the cash flow. For example by the use of excess cash flow over the initial investment, we can be able to rank the projects according to how much each project has generated within a specific period. The higher the excess value, the best rank it is given. By the use of the illustration below, we can rank the project as follows Excess...
Words: 948 - Pages: 4
...Questions: 1. Can you rank the projects simply by inspecting the cash flows? 2. What criteria might you use to rank the projects? Which quantitative ranking methods are better? Why? 3. What is the ranking you found by using quantitative methods? Does this ranking differ from the ranking obtained by simply inspection of the cash flows? 4. What kinds of real investment projects have cash flows similar to the cash flow below? Project Cash Flows Project Number Initial Investment (In thousands of dollars) Year 1 ($2.000,00) $330,00 $330,00 $330,00 $330,00 $330,00 $330,00 $330,00 $1.000,00 ...
Words: 1627 - Pages: 7
...Aplia: In addition to class preparation, for each chapter there are Aplia homework assignments, both practice and graded. Aplia is required of all students. Aplia’s homework questions and problems are tied to the textbook content and may not always agree completely with classroom discussions. Please read and comply with the Aplia instructions. For Aplia problems, use textbook formulas and 365 days in a year. Students are expected to complete all Aplia graded assignments by the specified due dates. There will be no extensions as the closing time is determined by computer. All assignments will be computer graded and scores and completion statistics will be reported by Aplia. Please see the Aplia documentation. Aplia assignments are the “homework” portion of the course grade and will be graded on the number of assignments completed and the percentage of correct answers as recognized by the computer. It is expected that students will spend approximately 2 to 3 hours, in addition to the time spent completing the Aplia assignments, preparing for each class. Additional time is required for the problems and analyses that are required. Attendance policy: There is a lot of material to be covered in this course. Therefore, it is important that every student attend every class, arriving on time. Attendance will be taken at the start of every class, and anyone not present will be marked absent. Three absences, for any reason, except University required activities, will result in a...
Words: 302 - Pages: 2
...Financial Management (BUSI 640) Professor Faulkender Investment Detective Case Questions The purpose of this case is to practice estimating the value created from taking on different projects and how those values change given differences in rates of return and project duration. We will look at different ways of evaluating capital budgeting decisions and see why Net Present Value (NPV) generates better decisions than other methods. Ignore the questions provided in the case itself. the Return on Investment (Excess of cash flow over initial investment divided by the initial investment). |No. |Project |Return on Investment | |1 |3 |400.00% | |2 |5 |110.00% | |3 |8 |107.50% | |4 |4 |78.05% | |5 |1 |65.50% | |6 |7 |28.00% | |7 |6 |10.00% | |8 |2 |8.25% | the payback period. |No. |Project ...
Words: 602 - Pages: 3
...Case Write-Up: The Investment Detective Case Summary The purpose of this case is to become a capital budgeting analyst and evaluate which set of free cash flows for 8 projects will result in the most effective investment for a firm’s capital. The objective given is to rank the four best that the company should accept. The case is broken down into three separate steps including the given information about estimated cash flows (inflows & outflows), determining the appropriate discount rate, and evaluating the cash flows using the IRR (Internal Rate of Return), MIRR (Modified Internal Rate of Return), NPV (Net Present Value), and other metrics. Each project is chosen solely on the basis of the quantitative analysis. Here are some factors to consider for this case: Each project has the same initial investment of $2 million; in addition, all are believed to be of the same risk class. The managers have determined that projects 7 and 8 are mutually exclusive. The issue is that the WACC has never been officially estimated and in the past the discount rate has been assumed at 10 percent (however, certain officers have asserted the discount rate to be higher). Ranking Projects Ranking projects simply through the inspection of cash flows is inadequate due to the time value of money and cost of capital of companies; the only piece of information that can be derived from looking at the cash flows is the amount of time it would take to be paid back (regular payback period). There...
Words: 1490 - Pages: 6
...Synopsis and Objectives This case presents the cash flows of eight unidentified investments, all of equal initial investment size. The task is to rank the projects. The first objective of the case is to examine critically the principal capital-budgeting criteria. A second objective is to consider the problem that arises when net present value (NPV) and internal rate of return (IRR) disagree as to the ranking of two mutually exclusive projects. Finally, the case is a vehicle for introducing the problem created by attempting to rank projects of unequal life and the solution to that difficulty—the equivalent-annuity criterion. (Questions for this case are on page 257) THE INVESTMENT DETECTIVE Comparative Analysis of Investments 1. Project free cash flows (in thousands of dollars) Project number 1 2 3 4 5 6 7 8 Initial investment $(2,000) $(2,000) $(2,000) $(2,000) $(2,000) $(2,000) $(2,000) $(2,000) Year 1 $ 330 $1,666 $160 280 $2,2001 $1,200 $(350) 2 330 3341 200 280 9001 (60) 3 330 $ 165 350 280 300 60 4 330 395 280 90 350 5 330 432 280 $ 70 700 6 330 4401 280 1,200 7 3301 442 280 $2,2501 8 $1,000 444 2801 9 446 280 10 448 280 11 450 280 12 451 280 13 451 280 14 452 280 15 $10,0001 $(2,000) $ 280 Synopsis and Objectives This case presents the cash flows of eight unidentified investments, all of equal initial investment size. The task is to rank the projects. The first objective of the case is to examine critically...
Words: 3248 - Pages: 13
...MGT 4430 Fall 10 Investment Detective 08 Fall Investment Detective MGT 4430 With the realization that capital resources are limited, a prioritization of proposed projects must be established. Although most of these projects may satisfy the requirements to accept a project, due to capital budget constraints a company must choose which project they might best benefit from after analyzing the data associated with each project. After looking at Exhibits 1-6 with analysis of each project’s NPV, MIRR, Payback, and Profitability Index a list can be established below. Rank | Project Number | 1 | 7 | 2 | 4 | 3 | 3 | 4 | 5 | 5 | 1 | 6 | 6 | 7 | 2 | 8 | 8 | After looking at the data analysis in Exhibit 1, we are able to eliminate a few projects right away from the ranking of choices we would be interested in. After seeing that project 7 and 8 are mutually exclusive and 7 being a better project based on the quicker payback and initial returns. As well we can see that project 2 is in most regards, a terrible investment. We are able to see a negative NPV and an unacceptable MIRR which is lower than our desired discount rate. At a glance we are also able to see that project 6 is on the brink of acceptable which allows our investment team to accurately rank the three lowest projects on the list. One issue that must be regarded before being able to further progress through my reasons for rank is that the company has acknowledged the potential for the...
Words: 620 - Pages: 3
...The University of Lethbridge Calgary Campus Faculty of Management Management 4430Y Financial Management Spring 2011 A.P. Palasvirta Office: Markin 4132, Lethbridge Phone: (403) 332-4582 e-mail: oz.palasvirta@uleth.ca Goal of Course Management 4430 is the capstone course in finance and will incorporate concepts you have learned in through your study of corporate, investments, and international. We will utilize the case methodology to focus our analysis. Cases describe a context in which a particular problem is found. Regardless of the particular characteristics of the problem, problem solving follows a general methodology: identification of the problem, describing the context of the problem, analysis of potential alternative solutions, the identification of the best solution, implementation of the best solution , and the creation of controls and contingency plans, if applicable. Text and Other Sources: E-book based on Case Studies in Finance, 6th ed., 2010, McGraw Hill, Toronto, ISBN Prerequisites Management 3412, Fundamentals of Investments Investments, Analysis & Management, 2nd Canadian Ed., 2005, Cleary & Jones, John Wiley & Sons Canada Ltd., Mississauga ISBN 0-470-83542-7 Management 3460, Corporate Finance Fundamentals of Corporate Finance, 6th Canadian Ed., 2007, Ross, Westerfield, Jordan, & Roberts, McGraw-Hill Ryerson, Toronto ISBN 13: 978-0-07-095910-1 A list of topics for which you should have working knowledge...
Words: 2667 - Pages: 11
...Marketing Function in FMCG Environment Brand Building The Role of Marketing in FMCG Environment The FMCG market is particularly competitive Category Leadership Greater Profitability Higher Investment Growth The Role of Marketing in FMCG Environment The KEY decision outputs recorded are: Market definition / segmentation Category/Brand vision Category drivers of value Business goals Brand/portfolio roles Where we will compete, where not and why Our future intention of what we will be Where our growth will come from Our business target, growth, share or margin Positioning, roles and strategy for the total brand portfolio (global and key regional / local brands) The main strategic actions / objectives / by channel or global strategic Customer How we will win, through specific actions and developing capability: innovation, communication, HR, resource priorities, etc. Metrics and milestones to track progress Must-stops and don’t starts How we will act as a team, our category culture What might destroy our plans Strategic actions Detailed strategies / capabilities Targets / measures What we will not do Team behaviour / culture Key risks Developing a Marketing Strategy for FMCG Case Study: How familiar are you with the Unilever 6P‟s Model? Market dynamics & financial returns Profit Turnover Price Volume Value market size Market growth Volume market size Volume share Value share Buying behaviour Loyalty Penetration Share of purchase Average pack...
Words: 547 - Pages: 3
...1. This is considered to be a “detective” case. 2. As a “detective” case, please consider the following elements to solve: a. What is the mission of the nonprofit? b. What “clues” exist in the narrative that distinguish the nature and/or mission of the nonprofit? c. How do the “clues” in the narrative “match” the financial information provided in the financial section? 3. EXAMPLE: a. Mission of nonprofit organization: i. The Ford Foundation is a charitable organization that has a mission of granting proceeds…. b. What “clues” exist in the narratives that distinguish the nature and/or mission of the nonprofit? i. The Ford Foundation has a large pool of investments and/or endowment; income is provided strictly from endowment; capital appreciation is classified as non-operating income; c. How do the “clues” in the narrative “match” the financial information provided in the financial section? i. Column 4 has a large investment category of $6 Billion; Column 4 has no inventory balance since the Ford Foundation only provides grants and no direct services; most of the revenue from Column 4 has been classified as non-operating… this is consistent with the narrative for the Ford Foundation d. CONCLUSION: i. The best match for the Ford Foundation is Column...
Words: 1167 - Pages: 5
