Case 16: Compute the IRR of each project, assuming a cost of capital of 10%. Rank the projects on the basis of IRR.

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Please answer the instructions above based on the information below, thank you for your help.

(Answer will be scanned, including within other Chegg answers, thumbs down for plagiarism)

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Case 16:

The essence of capital budgeting and resource allocation is a search for good investments in which to place the firms capital. The process can be simple when viewed in purely mechanical terms, but a number of subtle issues can obscure the best investment choices. The capital-budgeting analyst, therefore, is 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.

Suppose you are a new capital-budgeting analyst for a company considering investments in the eight projects listed in Exhibit 16.1. The CFO 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 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 firms weighted average cost of capital has never been estimated. In the past, analysts have simply assumed that 10% was an appropriate discount rate (although certain officers of the company have recently asserted that the discount rate should be much higher).

EXHIBIT 16.1 I Proiects' Free Cash Flows (dollars in thousands) *Indicates year in which payback was accomplished. Case 16: The Investment Detective Questions 1. Before doing any calculations, can we rank the projects simply by inspecting the cash flows ? Which of the projects, 7 or 8 , is more attractive ? Ranking by Risk Most risky Project 3 Project 8, Project 3, Project 4