1.For each set of project cash flows, calculate the Return on Investment (Excess of cash flow over initial investment divided by the initial investment) and the payback. Based upon these criteria, rank the projects.

2.For each set of project cash flows, calculate the Internal Rate of Return (IRR). Based upon these criteria, rank the projects.

3.For each set of project cash flows, calculate the Net Present Value, using discount rates of 8%, 10%, and 12%. For each discount rate, rank the projects. Explain why the ranking changes as the discount rate increases.

4.Why does the ranking from the IRR calculations differ from the NPV rankings?

5.If the projects were mutually exclusive and the firms cost of capital was 10%, which project would you choose?

Exhibit 1 The Investment Detective Projects' Free Cash Flows (dollars in thousands) Project number: 1 2 3 4 5 6 7 8 Initial investment $(2,000) $(2,000) $(2,000) $(2,000) $(2,000) $(2,000) $(2,000) $(2,000) Year $ 2,200* $ 1,666 334* 165 $ 330 330 330 330 330 330 330* $1,000 $ 1,200 900* 300 90 70 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 $ (350) (60) 60 350 700 1,200 $2,250* $ 160 200 350 395 432 4404 442 444 446 448 450 451 451 452 $(2,000) $ 280 280 280 280 280 280 280 280* 280 280 280 280 280 280 $ 280 $10,000* Sum of cash flow benefits $ 3,310 $ 2,165 $10,000 $ 3,561 $4,200 $2,200 $ 2,560 $4,150 Excess of cash flow over initial investment $ 1,310 $ 165 $ 8,000 $ 1,561 $2,200 $ 200 $ 560 $2,150 * Indicates year in which payback was accomplished