Group 8 - YP69A 3rd Case - The Investment Detective

FINANCIAL
MANAGEMENT & POLICY
Sofie Ratna Artanti (29123194)
Fawaz Irfan Mubarok (29123003)
Denisa Naura (29123145)
Yohanes Vito Perdana Sujudi (29123094)

22 February 2024
 Organizational Chart

FAWAZ IRFAN MUBAROK YOHANES VITO DENISA NAURA SOFIE RATNA ARTANTI
 First Question 3rd Case - The Investment Detective

QUESTION
Can you rank the project simply by inspecting
the cashflow?
Yes. We can see from the sum of cash flow benefits stated in the case. Based on the cash flow information provided in the exhibit​​, we can
attempt to rank the projects by inspecting the cash flows directly. The ranking will consider the magnitude of cash inflows, the timing of
these inflows, and the overall return relative to the initial investment.

Project 1: 3,310−2000 = $1,310

Project 2: 2,165−2,000 = $165
Project 3: 10,000 – 2,000 = $8,000
Project 4: 3,561 – 2000 = $1,561
Project 5: 4,200 – 2,000 = $2,200
Project 6: 2,200−2,000 =$200
Project 7: 2,560−2000 = $560
Project 8: 4,150 – 2,000 = $2,150
Formula of Excess Cash Flow:
Total Cash Flow - Initial Investment

The ranking of projects based on the excess cash flow over the initial investment is as follows: Project 3, Project 5, Project 8, Project 4,
Project 1, Project 7, Project 6, and Project 2. This ranking provides a more accurate overview of the projects based on their financial
performance in generating excess cash flow over the initial investment.
 Second Question 3rd Case - The Investment Detective

What criteria might you use to rank the projects?

Which quantitative ranking methods are better? Why?
QUESTION

We use 4 quantitative methods to rank the projects. Those are:

NPV which calculates the difference between the present value of cash inflows and outflows over a project's lifetime. A positive NPV indicates profit, while a
negative NPV indicates loss. The higher the NPV, the better. A positive NPV also means that the project generates greater returns than the cost of its investment.
IRR or Internal Rate of Return to know the discount rate that makes the NPV of all cash flows from a project equal to zero. An IRR that is higher than the discount
rate (interest rate) indicates a profitable project.
Payback Period (PP) to determine what time it takes for the project to recoup its initial investment from its cash flows. A shorter Payback Period indicates a
project that generates profits more quickly
Profitability Index (PI) to find the ratio of the present value of future cash flows to the initial investment.

Side Notes:
The payback period does not consider the time value of money and this method ignores cash flows after the original investment has been paid off.
The IRR method yields very similar results in comparison to using an investment’s NPV but has a few cons such as possible multiple rates of return, changes in
discount rates, and IRR’s inability to be added together.
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.

In our opinion, better to use NPV and IRR calculations because they’re account for the time value of money and provide a direct
measure of how much value the project adds or the project's return on investment, respective
 Second Question 3rd Case - The Investment Detective

What criteria might you use to rank the projects?

Which quantitative ranking methods are better? Why?
QUESTION

List of Method that can be used:

Net Present Value (NPV)

∑ : sum Profitability Index (PI)

t : time period of the cash flow
n : total number of period
Rt : cash flow at the time (t), positive for inflows, negative for outflows
i : discount rate per period Payback Period (PP)
(1+i) : discounting factor for time

Internal Rate of Return (IRR)

Ct : net cash inflow during the period t

IRR : Internal Rate of Return
t : time period of the cash flow
N : total number of periods
 Third Question 3rd Case - The Investment Detective

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?
QUESTION

Based on the quantitative financial evaluation methods used in the image, the ranking of the projects is as follows:

Project 1 Project 2 Project 3 Project 4

NPV : $73,086 NPV : -$85,455 NPV : $7,090,909 NPV : $707,006

IRR : 10.87% IRR : 6.31% IRR : 400% IRR : 15.17%
PP : 7 years (consistent cashflow) PP : 2 years (variable cashflow) PP : 1 year (lumpsum in 15th year) PP : 7 years (variable cashflow)
PI : 1.037 PI : 0.957 PI : 4.545 PI : 1.354

Project 5 Project 6 Project 7 Project 8

NPV : $62,672 NPV : $-0.23 NPV : $165,041 NPV : $182,984

IRR : 10.57% IRR : IRR: 10.00% IRR : 15.26% IRR : IRR: 11.41%
PP : 8 years (consistent cashflow) PP : 1 year (consistent cashflow) PP : 2 year (variable cashflow) PP : 7 year (variable cashflow)
PI : 1.031 PI : 1.000 PI : 1.083 PI : 1.091
 Third Question 3rd Case - The Investment Detective

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?
QUESTION

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

NPV : $7,090,909 NPV : $707,006 NPV : $165,041 NPV : $182,984 NPV : $73,086 NPV : $62,672 NPV : $-0.23 NPV : -$85,455
IRR : 400% IRR : 15.17% IRR : 15.26% IRR : IRR: 11.41% IRR : 10.87% IRR : 10.57% IRR : IRR: 10.00% IRR : 6.31%
PP : 1 year (lumpsum in 15th year) PP : 7 years (variable cashflow) PP : 2 year (variable cashflow) PP : 7 year (variable cashflow) PP : 7 years (consistent cashflow) PP : 8 years (consistent cashflow) PP : 1 year (consistent cashflow) PP : 2 years (variable cashflow)
PI : 4.545 PI : 1.354 PI : 1.083 PI : 1.091 PI : 1.037 PI : 1.031 PI : 1.000 PI : 0.957

In comparing projects quantitatively, we consider NPV, IRR, or PBP. Here is an overview of the analysis when sorting based on NPV and IRR:

Project 3 - has the highest NPV of US$7,090,909 and the highest IRR of 400%. This indicates that this project provides a very large financial value-add compared to the
other projects.
Project 4 - has the second-highest NPV of US$707,006 and the second-highest IRR of 15.17%. This project provides a good financial return after Project 3.
Project 7 - has the third-highest NPV of US$165,041 and the third-highest IRR of 15.26%. This project provides a good financial return in third place.
Project 8 - has the fourth-highest NPV of US$182,984 and the fourth-highest IRR of 11.41%. This project provides a good financial return in fourth place.
Project 1 - has the fifth-highest NPV of US$73,086 and the fifth-highest IRR of 10.87%. This project provides a good financial return in fifth place.
Project 5 - has the sixth-highest NPV of US$62,672 and the sixth-highest IRR of 10.57%. This project provides a good financial return in sixth place.
Project 6 - has the seventh-highest NPV of almost zero (US$-0.23) and the seventh-highest IRR of 10%. This project just breaks even.
Project 2 - has the lowest NPV of US$-85,455, which indicates that this project is not viable based on the NPV method.

So based on the quantitative financial evaluation methods used, the ranking of the best projects is Project 3, followed by Project 4, Project 7,
and so on.
 Fourth Question 3rd Case - The Investment Detective

What kinds of real investment projects have cash flows

similar to those in Exhibit 1?
QUESTION

Project 1: Real estate development projects, property & land investment

Project 2: Infrastructure & industrial or manufacturing project, Car installment
Project 3: Equipment & Machinery, purchase or leasing production equipment
Project 4: Research & development (R&D), technology development or software startups
Project 5: Business acquisition, Depreciation of assets at a company
Project 6: Venture capital investments, Bitcoin investment & Mutual fund futures
Project 7: Conservation and Sustainability, natural resource conservation & energy efficiency projects
Project 8: Education and training, job training & leadership development programs
Group 8 - YP69A 3rd Case - The Investment Detective

Thank you
For your attention