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The Investment Detective
Fin450
Case 1
1. Yes, by using the payback period method. The shortest payback period will be in project 6. However this method isn't accurate because it doesn't take into consideration the following points:
a. Ignores the time value of money
b. Ignores cash flows after the payback period
c. Biased against long-term projects
d. Requires an arbitrary acceptance criteria
e. A project accepted based on the payback criteria may not have a positive NPV
2. The quantative methods we will use to see what projects to undertake are: NPV, IRR, incremental IRR and PI.
-NPV is the best quantitative ranking method because:
• Accepting positive NPV projects benefits shareholders.
? NPV uses cash flows
? NPV uses all the cash flows of the project
? NPV discounts the cash flows properly
• Reinvestment assumption: the NPV rule assumes that all cash flows can be reinvested at the discount rate.
3- It differs from the payback method.
Rankings
1 2 3 4 5 6 7 8
NPV 73.09 -84.45 393.92 228.22 129.7 0 165.04 182.89
IRR 10.87 6.308 11.33 12 ...