1. CAPITAL BUDGETING CRITERIA The essence of capital butheting and reseurce aliocation is a search for gocd investments to place the firm's capilal. The process can be simple when viewed in purely mechanical termo, but a number of subtie issues can obscure the best investment choices. The capital-budgeting analyst, therefoce, in necessarily a detective who must winnow bad evidence from good. Much of the challenge is in knowing what quantitative analysis to generate in the first place. Suppore you are a new capital-budgeting analyst for a cornpatr comsidering ifveitmeets in the eight projects listed in Exhbe 1. The chied financial officer of vour company has asked you to rank the projects and recommend the "four best" that the company should accept. In this abaignenent, only the quantitative considerations are relevant. Wo other project characteristics are deciding factors in the selection, except that management has determined that prejects 7 and 8 are mutually exclusive. All the projects require the same initial investment; $2 million. Moreover, all are believed to be of the same risk class. The firm's wrighted average cost of capital has never been estimated. In the past. analysts have simply assumed that 10% was an appropriate dicount rate falthouch certain officers of the company have recently asserted that the discount rate should be mich higher). To stimulate your analysirh, consider the following questions: a. Can you rank the peojects simply by inspecting the cash floras? Why or why not? b. Which quantitative ranking methods will you use to tank the projects? Which are the best and why? c. What is the ranking you found by using quantiative methods? Does this rarking diafer from the ranking obtained by simple inspection of the cash flows? d. What kinds of real ifrestment projects have cash flows similar to those in Ewhibit 1