Description
Q1-) Give real life example for each 8 projects!
Q2-) Can you simply evaluate the projects based on simple cash flows? Why, why not?
Q3-) Calculate NPV, IRR, EAA, Pay Back Period Cash and Profitability Index based on your discount
rate assumption. Clearly mention why you choose that discount rate.
Q4-) Assume the projects are replicable and discount rate is 10%! Choose ONLY ONE method to rank
the projects. Clearly mention why you choose that method and which assumptions you made to
choose that method. Remember there are mutually exclusive projects!
Q5-) Is your method sensitive to discount rate? (use 12% discount rate)
Q1-) Give real life example for each 8 projects!
Q2-) Can you simply evaluate the projects based on simple cash flows? Why, why not?
Q3-) Calculate NPV, IRR, EAA, Pay Back Period Cash and Profitability Index based on your discount
rate assumption. Clearly mention why you choose that discount rate.
Q4-) Assume the projects are replicable and discount rate is 10%! Choose ONLY ONE method to rank
the projects. Clearly mention why you choose that method and which assumptions you made to
choose that method. Remember there are mutually exclusive projects!
Q5-) Is your method sensitive to discount rate? (use 12% discount rate)
For the exclusive use of O. Shukair, 2022.
UV0072
Rev. Mar. 21, 2016
The Investment Detective
The essence of capital budgeting and resource allocation is a search for good 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. 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 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 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 stimulate 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 Exhibit 1?
This case was prepared by Robert F. Bruner, with the permission of Professor Gordon Donaldson, the author of an antecedent case. It was written as a
basis for class discussion rather than to illustrate effective or ineffective handling of an administrative situation. Copyright ? 1988 by the University of
Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mail to [email protected]. No part
of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means?electronic, mechanical, photocopying, recording,
or otherwise?without the permission of the Darden School Foundation.
This document is authorized for use only by Omar Shukair in Business Investment Valuation-1-1-1-1 taught by FERHAT AKBAS, University of Illinois at Chicago from Jan 2022 to Jul 2022.
For the exclusive use of O. Shukair, 2022.
Page 2
UV0072
Exhibit 1
The Investment Detective
Projects? Free Cash Flows
(dollars in thousands)
Project number:
1
2
3
Initial investment
$(2,000)
$(2,000)
$(2,000)
Year
$ 330
330
330
330
330
330
330*
$ 1,000
$ 1,666
334*
165
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
Sum of cash flow
benefits
$ 3,310
Excess of cash flow over
initial investment
$ 1,310
5
6
7
8
$(2,000)
$(2,000)
$(2,000)
$(2,000)
$(2,000)
$ 280
280
280
280
280
280
280
280*
280
280
280
280
280
280
$ 280
$ 2,200*
$ 1,200
900*
300
90
70
$ (350)
(60)
60
350
700
1,200
$2,250*
$10,000*
$ 160
200
350
395
432
440*
442
444
446
448
450
451
451
452
$(2,000)
$ 2,165
$10,000
$ 3,561
$4,200
$2,200
$ 2,560
$4,150
$
$ 8,000
$ 1,561
$2,200
$ 200
$ 560
$2,150
165
4
* Indicates year in which payback was accomplished.
This document is authorized for use only by Omar Shukair in Business Investment Valuation-1-1-1-1 taught by FERHAT AKBAS, University of Illinois at Chicago from Jan 2022 to Jul 2022.
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