Suppose you are a financial analyst for a company considering investments in eight projects listed below. The CFO 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 this 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 firm's 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).

To simulate your analysis, consider the following questions:

1. Can you rank the projects simply by inspecting the cash flows? 2. What criteria might you use to rank the projects? Which quantitative ranking methods are better? Why? 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? 4. What kinds of real investment projects have cash flows similar to those in in Exhibit 1?

Outline for the Case Analyses

• Major Facts
  • Briefly state the key major facts as you see them. Make statements clear and concise for your understanding and the understanding of the other students and the instructor.
• Major Problem
  • State the major problem as you see it. Emphasize the present major problem. You may wish to phrase your statement in the form of a question. In a few cases, there may be more than one major problem. A good problem statement will be concise, usually only one sentence.

• Possible Solutions
  • List the possible solutions to the major problem. Let your imagination come up with alternative ways to solve the problem.
  • Do not limit yourself to only one or two possible solutions. These solutions should be distinct from each other.
  • However, you may wish to include portions of one solution in another solution, as long as each solution stands alone. Only in this manner will your subsequent choice be definitive.
  • Briefly note the advantages and disadvantages of each possible solution.

• Choice and Rationale
  • State your choice, and the detailed reasons for your choice. You may also briefly state your reasons for not choosing the alternative solutions.

• Implementation
  • This should be a key focus of your analysis. Describe the actions that a manager should immediately take. Then describe what future actions will take over the next few days or weeks to implement the solution you recommend. The solution should be practical to implement, given the facts of the case. Do not assume that an unlimited budget or other resources will be available.

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)
1	$330	$1,666		$160	$280	$2,200*	$1,200	$(350)
2	330	334*		200	$280		900*	(60)
3	330	165		350	$280		300	60
4	330			395	$280		90	350
5	330			432	$280		70$	700
6	330			440*	$280			1,200
7	330*			442	$280			$2,250*
8	$1,000			444	$280*
9				446	$280
10				448	$280
11				450	$280
12				451	$280
13				451	$280
14				452	$280
15			$10,000*	$(2,000)	$280

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.