Capital Budgeting

    Suppose you are a new capital-budgeting analyst for a company considering investments in the eight projects listed in the table below. The chief financial officer of your company has asked you to rank the projects and recommend the “four best” that the company should accept. In this assignment, only the quantitative considerations are relevant. No other project characteristics are deciding factors in the selection, except that management has determined that projects 3 and 4 are mutually exclusive. All the projects require the same initial investment, $10 million. Moreover, all are believed to be of the same risk class. The weighted-average cost of capital of the firm has never been estimated. In the past, analysts have simply assumed that 8 percent was an appropriate discount rate (although certain officers of the company have recently asserted that the discount rate should be much higher). To stimulate your analysis, consider the following questions: 1. Can you rank the projects simply by inspecting the cash flows? Show your ranking? 2. What criteria might you use to rank the projects? Which quantitative ranking methods are better? Why? 3. What is the ranking you found by using the quantitative method? Does this ranking differ from the ranking obtained by simple inspection of the cash flows?