Financial Management (BUSI 640) Professor Mathews

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.

1. For each set of project cash flows, calculate the Return on Investment (Excess of
cash flow over initial investment divided by the initial investment). Based upon
these criteria, rank the projects.

2. For each set of project cash flows, calculate the payback period. Based upon
these criteria, rank the projects.

3. For each set of project cash flows, calculate the Internal Rate of Return (IRR).
Based upon these criteria, rank the projects.

4. For each set of project cash flows, calculate the Net Present Value, using discount
rates of 8%, 10%, and 12%. For each discount rate, rank the projects. Explain
why the ranking changes as the discount rate increases.

5. Why does the ranking from the IRR calculations differ from the NPV rankings?

6. If the projects were mutually exclusive and the firms cost of capital was 10%,
which project would you choose?