Investment Appraisal The core of capital budgeting and resource allocation is a search for proper investments in which to place the firm's capital. The process can be simple when viewed in purely mechanical terms, but a number of subtle issues can obscure the best investment choices. Suppose you are a new capital-budgeting analyst for a company considering investment in the eight projects listed in Table 1. The CFO of you company has asked you to rank the projects and recommend the 'three 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 the management has determined the projects 7 and 8 are mutually exclusive. All the projects require the same initial investment. Moreover, all are believed to be of the same risk class. The analysts assumed that 15% was an appropriate discount rate. To stimulate your analysis, consider the following question: 1. Can you rank the projects simply by inspecting the cash flows? Why? 2. Use the following quantitative methods to rank the projects: NPV IRR 3. What is the ranking you found by using quantitative methods? Does this ranking differ from the ranking obtained by simple inspection of the cash flows? Table 1. Project Free Cash Flows (in $ Thousands) ENG 20:14 Project Free Cash Flows (in $ Thousands) Project Number Initial Investment 0000 2,250 ($2,000)|($2,000) ($2,000) ($2,000) ($2,000) ($2,000) ($2,000) ($2,000) Year 1 $330 $1,666 $160 280 $2,200 $1,200 $350) 2 350 354 280 200 900 -60 3 370 196 350 280 200 300 60 390 0 395 280 200 90 350 330 043280 200 70 700 330 80200 1,200 350 380 200 1,000 - 1,000 80 200 200 450 280 200 50 451 280 200 280 200 200 452 280 10,000 -2,000 280 -2,000 380 280 200