The essence of capital budgeting and resource allocation is a search for good investment to place the firm capital. The process can be simple when viewed in purely mechanical terms, but a number of subtle issues can be obscure the best investment choices. The capital budgeting analyst therefore is necessary 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 eight projects listed in Exhibit 1. The Chief Financial Officer of your company has asked you to rank the project and recommend the four best that the company should accept.

In this assignment only quantitative considerations are relevant. No other project characteristics are deciding factors in the selection, except that management has determined that project 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 weightage average cost of capital has never been estimated. In the past, analyst have simply assumed that 10% was an appropriate discount rate.

Required.

1. You are to evaluate the investment proposals using the;
2. Net Present Value (5 marks)
3. Internal Rate of Return (5 marks)
4. Payback Period (5 marks)

Exhibit 1 (Figures are in 000)

Projects:	1	2	3	4	5	6	7	8
Year
0	-2000	-2000	-2000	-2000	-2000	-2000	-2000	-2000
1	330	1666	0	160	280	2200	1200	-350
2	330	334	0	200	280		900	-60
3	330	165	0	350	280		300	60
4	330		0	395	280		90	350
5	330		0	432	280		70	700
6	330		0	440	280			1200
7	330		0	442	280			2250
8	1000		0	444	280
9			0	446	280
10			0	448	280
11			0	450	280
12			0	451	280
13			0	451	280
14			0	452	280
15			10000	-2000	280