The Investment Detective
1) Without taking into account the time value of money, the projects ranked according to the cash flow are as follows:
3 , 5 , 8 , 4 , 1 , 7 , 6 , 2
Based strictly on cash flow, the project that can generate the most excess cash over initial investments will be ranked first.
2) Criteria used are the no. of years that the investment amount was recovered and the discount rate.
There are several evaluation methods:
Accounting Rate of Return
A project is considered acceptable if it is expected to produce an average profit relative to the level of investment at a rate at least equal to the firm’s desired return on investment.
ARR = Average Profit / Initial Investment
Payback Method
Measure of the expected time before the initial investment will be recovered. Accept the project if payback is faster than the targeted payback. This method ignores the time value of the cash flows and their riskiness.
Internal Rate of Return
An investment project will be......
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