INDIVIDUAL INVESTMENT PORTFOLIO

Individual Investment Portfolio



Individual Investment Portfolio

Introduction

The paper attempts to compare and analyze 3 different portfolio investments in a comprehensive manner. It mentions three different portfolio investments with the use of investment appraisal techniques applying the concept of NPV and IRR along with other risk analysis techniques.

Discussion

All the representation of the below mentioned calculations is on the basis of assumptions. However, the investment appraisal techniques applied are actual and the analysis provided pertains to the investment appraisal technique outputs.



Investment A

Year

Cash inflow

Tax Amount

Operating Cash Flow

1

£ 24,500,000

£ 5,749,500

£ 13,415,500

2

£ 28,010,850

£ 6,604,830

£ 15,411,270

3

£ 32,024,805

£ 7,584,192

£ 17,696,447

4

£ 36,613,959

£ 8,702,817

£ 20,306,573

5

£ 41,860,740

£ 9,983,705

£ 23,295,312

Investment B

Year

Cash inflow

Tax Amount

Operating Cash Flow

1

£ 19,200,000

£ 3,900,600

£ 9,101,400

2

£ 21,951,360

£ 4,491,798

£ 10,480,863

3

£ 25,096,990

£ 5,167,716

£ 12,058,003

4

£ 28,693,389

£ 5,940,492

£ 13,861,148

5

£ 32,805,151

£ 6,824,007

£ 15,922,683

Investment C

Year

Cash inflow

Tax Amount

Operating Cash Flow

1

£ 28,200,000

£ 5,349,500

£ 22,850,500

2

£ 29,310,850

£ 5,923,830

£ 23,387,020

3

£ 31,524,805

£ 6,574,892

£ 24,949,913

4

£ 33,913,959

£ 7,102,717

£ 26,811,242

5

£ 39,660,740

£ 8,923,455

£ 30,737,285

Terminal Cash Flows are the cash flows that are retrieved on the termination of a project. It includes all the amounts regarding the project termination like residual values, sale of equipments and other cash inflows (Balakrishnan, Sivaramakrishnan, Sprinkle, 2008, pp 80 - 8, 1).

£

Net Present Value (NPV)

Net Present Value is a financial indicator that measures the flow of future revenue and expenses will have a project to determine if, after deducting the initial investment, we would make a profit. If the result is positive, the project is viable. The Net Present Value also allows us to determine which the most profitable project among several investment options is (Weygandt, Kimmel, Kieso, 2009, pp 100 - 111). The Net Present Value is the net value of a project after discounting all the cash flows to the investment year. The Net Present Value of both the projects is as calculated:

Net Present Value = Present Value of Outflows - Present Value of Inflows

Internal Rate of Return (IRR)

The Internal Rate of Return is the discount rate of an investment project that allows the total cash inflows to be equal to the investment (Net Present Value equal to 0). The Internal Rate of Return is the maximum discounting rate that may have a project to be profitable, since a higher rate would cause the total cash inflows to be less than the investment (Net Present Value less than 0). The higher the internal rate of return, the more profitable the investment is likely to be. However, the internal rate of return alone cannot judge an investment, the utilization of Net Present Value calculations prove helpful in deciding as to what project to be chosen (Ryan, O'Brien, 1990, pp 92 - 99).

Net Present Value (NPV) and Internal Rate of Return (IRR) - Investment A

Discount rate

3%

Year

0

1

2

3

4

5

Net Cash flow

(18,545,900)

13,415,500

15,411,270

17,696,447

20,306,573

23,295,312

Discount Factor

1.03

1.06

1.09

1.13

1.16

Discounted CF

(18,545,900)

13,024,757.28

14,526,600.06

16,194,755.87

18,042,127.10

20,094,740.77

Investment Measures

NPV =

£ 63,337,081.075

IRR =

79.40 %

Net Present Value (NPV) and Internal Rate of Return (IRR) - Investment B

Discount rate

3%

Year

0

1

2

3

4

5

Net Cash flow

(10,180,000)

9,101,400

10,480,863

12,058,003

13,861,148

15,922,683

Discount ...