Case 17 – The Investment Detective
The case of the Investment Detective laid out the cash flows for us in each of eight different projects. Before doing any calculations we came up with the assumption that we could not rank the projects simply by inspecting the cash flows.
Without the ability to rank the projects based off of cash flows solely, we had to use some analytical criteria as a capital budgeting analyst to provide some thorough support and reasoning for how we ranked the four best projects. In this case we are only using quantitative considerations that we deem to be relevant and no other project characteristics are deciding factors in our selection of the best four projects. When coming up with our calculations to rank the four best projects we have to take into account that each project is going to require an initial investment of two million dollars and in using historical data from other capital budgeting analysts in the firm, we deemed a ten percent discount rate as an appropriate figure for our calculations.
The analytical criteria in which we feel we gives us the best results to help us choose the top four projects are Net Present Value, Internal Rate of Return, and the Payback Period calculation. We are basing our rankings solely on the results we receive from our Net Present Value calculations because we feel this method to be the most consistent and it also takes into account all of the cash flows as well as the time value of money. If a positive Net Present Value calculation is received than that means that the project is expected to add value to the firm and will therefore increase the wealth of the owners. With each project we are looking to maximize owner wealth and with the Net Present Value technique, the calculation is a direct measure of how well each individual project will meet the goal of maximizing owner wealth. Although Net Present Value is our primary decision making criterion, the most important alternative to Net...
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