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How would you analyze the following structured fixed income investment opportunities that require an initial outlay of $18 million initially and a further expenditure in year 5 of 20 million (assume a hurdle rate of 5%). The first investment has a cash flow return of 4.5 million per year for 15 years at a discount rate of 7%, the second investment has a cash flow of 3.3 million per for years 1-5 and and 6.0 million per year for years 6-12 at a discount rate of 6% and a third investment with a cash flow of 1.55 million in years 1-4 and 7.5 million for years 5-14 with a discount rate of 8%. What is the best investment on a net present value basis? Does it change with IRR?

Please note, I am not looking for you to solve this problem (unless you really want to). Please treat it as a homework and provide explanation on how to approach it. thanks.

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What kind of quant role asks about NPV and IRR? This is like introduction to general finance. – chrisaycock♦ Nov 19 '12 at 22:29
1  
CFA Level I - Discounting Cash Flows, not really a professional quant question is it? – SRKX♦ Nov 19 '12 at 22:58
Either CFA or an MBA class assignment. In any case the guy did not do any work on his own, I would like to suggest to add to the question format the requirement to show some initial work done, thought process, anything. This guy just appears dead lazy and asks others to do his work. I refuse to assist in answering such questions!!! Can we close this or, OP, can you actually add some content of your own thought process? – Freddy Nov 20 '12 at 1:31
I don't have any thoughts, I want someone to do it for me. – vehomzzz Nov 28 '12 at 20:21

closed as off topic by Quant Guy, jeff m, Louis Marascio, SRKX♦, vonjd Nov 20 '12 at 13:14

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1 Answer

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In case you don't feel that much comfortable (maybe) by lack of experience with such investments, answer in an academic fashion.

  • Explain key concepts: NPV, IRR ... and show formula

  • Explain how you compute the return on both investments, and other performance indicators that may needed (yield?).

  • Suggest an 'obvious' answer to the change in IRR scenario question, and show how financial stuff gets you to this obvious answer.

Good luck!

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