Deck 15: Investment Analysis: What Should We Do Next

Question 1

Profitability refers to revenues earned and expenses earned. Investment analysis is concerned with cash flows. Explain your answer.

Answer 1

True
Investment analysis focuses on actual inflows and outflows of cash, which is not the same as profitability.

Question 2

Which project has the better payback period? Project A requires a $25,000 investment and provides $5,000 per year for 6 years; Project B requires an $8,000 project and provides $4,000 per year for 2 years. Explain the strengths and weaknesses of this approach.

Answer 2

Project B has the faster payback period. However, Project B doesn't make any profit for the organization. The payback method helps show how quickly the organization gets back its money. But it doesn't consider the cash flows or time value of money of the investment decisions.

Question 3

Suppose you had $200,000 and wished to receive equal payments every year for 15 years, and your interest rate was 5% per year. Write the Excel formula with inputs to calculate how much the payments would be.

Answer 3

=PMT(5%, 15, 200000)
= $19, 268.46

Question 4

Suppose in 10 years you needed to have saved $50,000 for a capital investment of your organization. You believe you can save $2,500 at the end of each year. What rate of return is needed to attain the needed $50,000?

Question 5

The net present value method determines whether or not a project meets or exceeds a desired hurdle rate. Explain your answer.

Question 6

Identify one strength and weakness of the internal rate of return.