Supposed you are a new capital budgeting analyst for a company considering inves

Question

Supposed you are a new capital budgeting analyst for a company considering investments in the eight projects listed in Exhibit 1. The chief financial officer of your company has asked you to rank the projects and recommend the "four best" that the company should accept

Part I

For the first part of this assignment only quantitative considerations are relevant. No other project characteristics are deciding factors in the selection, except that management has determined that projects 7 and 8 are mutually exclusive.

All projects require the same initial investment, $2,000,000. Moreover, all are believed to be of the same risk class. The weighted average cost of capital for the first part is 10%. To simulate your analysis, consider the following questions:

Can you rank the projects simply by inspecting the cash flows?

What criteria might you use to rank the projects? Which quantitative ranking methods are better? Why?

What is the ranking you found by using quantitative methods? Does this ranking differ from the ranking obtained by simple inspection of the cash flows?

What kinds of real investment projects have cash flows similar to those in the exhibit?

Explanation / Answer

Can you rank the projects simply by inspecting the cash flows?

Ans) we cannot simply rank the projects by inspecting the cash flows of the company. We have to consider the all the relevant factors into consideration.

What criteria might you use to rank the projects? Which quantitative ranking methods are better? Why?

Ans)

Normally we have to use the NPV, IRR, Payback period with using the time value of the firm are consider for the ranking the project. These methods will give true color of the project

The ranking methods are really useful for determine the good project with less investment and more profit to the company.

What is the ranking you found by using quantitative methods? Does this ranking differ from the ranking obtained by simple inspection of the cash flows?

Ans)

Ranking have found by using the quantitative methods will differ from raking which was found by using the simple inspection of the cash flows.

What kinds of real investment projects have cash flows similar to those in the exhibit?

Ans)

In the problem we can see that only investment of the project only we cannot find any outcomes of the project like cash outflow of the company so we cannot give any assurance that all project cash out flow will same.

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