BUS 520 Module 3 SLP (Revisions)

1

Running Head: INVESTMENT ANALYSIS

INVESTMENT ANALYSIS 2

Trident University International

Anthony D. Bradshaw

Investment Analysis

BUS 520 Business Analytics and Decision Making

Dr. Margaret Sabe

19 June 2016

Introduction

I am faced with three investment options but only enough resources to investment in one at time which has necessitated a complete analysis of the options available. The first option which shall henceforth be referred to as Option A is investing real estate development and it requires an initial investment of seven hundred and fifty thousand dollars. Option B which is investing in a boutique for fashion hats requires an initial investment of five hundred and fifty thousand dollars while option C is investing into municipal bonds. Option C has the lowest risk since it is sponsored by a government but it also has a relatively high return. Option A is the riskiest but among the three, it has the potential of yielding the highest returns. On the other hand, Option B is relatively risky compared to option C but less risky compared to A and thus it has average returns. Since I can only choose one investment, risk and returns in high, medium and low scenarios will be evaluated in order to choose the best investment plan.

Excel Analysis

Please refer to the attached excel file for a detailed decision tree analysis of the investment choices available.

Analysis of Excel

Observations

Option C has the same NPV in all scenarios while A, and B have different NPV’s and a dramatic drop in income can be noted between the high, medium, and low scenarios. In all three income scenarios for all investment options, a point of break-even is achieved and in option B and C, the investment is able to turn a profit even during times of low income while option A does not manage a profit during times of low income. However, Option A outperforms the other investments during a high scenario. Option A and C require the same amount of initial investment while option B requires slightly less initial investment.

Assumptions

· The discounting rates for the investments remain the same for the entire 10 year period of the analysis.

· Inflation grows at the expected rates.

Discussion and Recommendation

Option A has the highest risk so it goes to reason that it has the highest return for the high NPV scenario. By observation, the obvious choice would be to pick option C since its return is stable. Between options A and B, there is a 0.67 chance that option A will outperform B and the amount of NPV earned in either of those two instances is enough to justify the extra $200,000 invested in A and the extra risk taken on.

Between options A and C, A can only outperform C one out of three times and during high income, A achieves a 50% higher income which is the reward for taking on extra risk. However, choosing option A over C would result in the loss of $900,000 and $1,500,000 during medium and low income scenarios. In this case, the likely losses are more significant than the likely gains thus the best option to choose is C. Investing in municipal bonds provides the best value for money at the lowest risk. This recommendation is supported by the decision tree analysis which shows that choosing option C despite it having a higher initial cost than B is the right decision.

Bonus

For Options A and B to be equal, the NPV of A during high NPV scenario would have to be less than it is. That is, it would have to be $4,500,000 in order to produce an expected NPV of $2,250,000. The NPV at medium would also decrease to $1,000,000 but the NPV at low scenario would have to be $500,000 in order for all the expected NPV’s of option A to be equal to those of option B.