Evaluation of alternative capital investment projects : authoring a fictional teaching case

Abstract

The aim of this thesis is to create a framework to analyze capital investment projects. The teaching case was designed as a byproduct of this thesis which is targeted to be used as a teaching material in a university level investment management course. The goal of the fictive teaching case is to encourage students to become enthusiastic about making investment decisions and in all challenge the process. The case should help students to generally observe problems around investment decision-making, and make it easier to analyze investment projects. This thesis presents a solution approach to consider the investment opportunities of the fictive teaching case.

The capital investment possibilities of the case are evaluated through cash-flow estimation. This thesis suggests that first when evaluating alternative capital investment projects, the firm’s management should consider the firm’s own goals for the future. The goal reveals also much about the risk bearing capacity of the firm. For example, if the firm’s goal is to grow it acts differently than when it is just trying to survive to the next month. After recognizing the future goals and analyzing the risks of the possible investment opportunities, the net present values of the possible investment opportunities are calculated. Generally, it can be said that one should invest in every project that is worth more than its cost. This thesis proposes that managers should consider risks and their own firm’s goals along with the firm’s net present value after choosing one new investment opportunity.