The Investment Detective
Project 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)
Year
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 is accomplished
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?
1. Although we can rank the projects by simply inspecting the cash flows, it is still not a good measure to rank them.
The Ranking by simply
Initial investment (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)
2 330 334 200 280 900 (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 is accomplished
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?
1. Although we can rank the projects by simply inspecting the cash flows, it is still not a good measure to rank them.
The Ranking by simply