1MATH4001 Case Study #3 Rushabh Parmar #101400513 Amazoni Macrosoft Goofle Initial investment = -$70,513 BA II PLUS Calculation Cash flow (CF) No. of years ($) CF0 = -70513 F0 C01 = 14102.60 F01 = 1 70513/5 C02 = 16310 F02 = 1 C03 = 2175 F03 = 1 C04 = 36280 F04 = 1 C05 = 11752.17 F05 = 1 70513/6 C06 = 8580 F06 = 1 C07 = 9557 F07 = 1 C08 = 12415 F08 = 1 C09 = 16734 F09 = 1 C10 = 10073.29 F10 = 1 70513/7 Initial investment = -$70,513 BA II PLUS Calculation Cash flow (CF) No. of years ($) CF0 = -70,513 F0 C01 = 23504.33 F01 = 1 70,513/3 C02 = 41230 F02 = 1 C03 = 4610 F03 = 1 C04 = 5179 F04 = 1 C05 = 17628.25 F05 = 1 70513/4 C06 = 1000 F06 = 1 C07 = 13697 F07 = 1 C08 = 1872 F08 = 1 C09 = 25780 F09 = 1 C10 = 35256.50 F10 = 1 70513/2 Initial investment = -$70,513 BA II PLUS Calculation Cash flow (CF) No. of years ($) CF0 = -70,513 F0 C01 = 8814.125 F01 = 1 70,513/8 C02 = 2802 F02 = 1 C03 = 2788 F03 = 1 C04 = 36790 F04 = 1 C05 = 35256.50 F05 = 1 70513/2 C06 = 5796 F06 = 1 C07 = 5627 F07 = 1 C08 = 7200 F08 = 1 C09 = 12151 F09 = 1 C10 = 14102.60 F10 = 1 70513/5 I=9 CPT NPV $19,706.75 I=9 CPT NPV $40,229.97 I=9 CPT NPV $12,761.17 CPT IRR 15.27% CPT IRR 22.55% CPT IRR 12.73% IRR (Internal rate of return) From the calculations above, by inputting the values of initial investment and the subsequent cash flows (profit) along with the number of cash flows (years) in the BA II+ calculator, each of the company has the following IRR, ranking from the highest at the top to the lowest at the bottom. 1. Macrosoft 2. Amazoni 3. Goofle : 22.55% : 15.27% : 12.73% Payback period 1. Amazoni’s investment payback period will be 4.14 years, calculated as – o Years before full recovery + Unrecovered cost at the start of the year (Initial investment – Total amount received till the 4th year before the cash flow outgrows the investment) Cash flow during the 5th year o 4 + ($70,513 – $68,867.60) $1,1752.17 2. Macosoft’s investment payback period will be 3.23 years, calculated as – o Years before full recovery + Unrecovered cost at the start of the year (Initial investment – Total amount received till the 3rd year before the cash flow outgrows the investment) Cash flow during the 4th year o 3 + ($70,513 – $69,344.33) $5,179 3. Goofle’s investment payback period will be 4.55 years, calculated as – o Years before full recovery + Unrecovered cost at the start of the year (Initial investment – Total amount received till the 4th year before the cash flow outgrows the investment) Cash flow during the 5th year o 4 + ($70,513 – $51,194.125) $35,256.50 • Clearly, Macrosoft’s investment payback period is the shortest of the three companies. However, this method has serious shortcomings and is only considered because it is still widely used. NPV (Net present value) After using the Texas BA II PLUS Cash Flow worksheet to input the CF0 and further cash flow values, and considering 9% cost of capital, ( I = 9 ; CPT NPV) I would invest in Macrsoft, for it has the highest NPV of $40,229.97 Whereas, Amazoni’s NPV is less than 50% to that of Macrosoft, at $19,706.75, Goofle has the lowest net present value of $12,761.17 In conclusion, I would choose to invest in Macrosoft above the other two, given it has the highest internal rate of return and net present value along with the shortest payback period.
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