All projects require the same initial investment, $2,000,000. Moreover, all are believed to be of the same risk class. The weighted average cost of capital for the first part is 10%. 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 the exhibit?

 

The company has the following capital structure:

Account	$	Costs before tax
Long-term Debt	2,000,000	10%
Preferred Stock	500,000	14%
Common Stock	2,500,000	16%

 

1. Calculate the weighted average cost of capital (tax is 36%)

2. Using the same cash flows in exhibit I find the NPV, PI, IRR. Which project(s) would you recommend and why? 

Answer rating: 100% (QA)

1 Can you rank the projects simply by inspecting the cash flows It is not possible to rank the projects simply by inspecting the cash flows because the cash flows in each project are spread over diffe... View the full answer