Abstract
Students must evaluate eight projects' cash flows and rank the projects in terms of their economic attractiveness. Students can use all possible criteria [net present value (NPV), internal rate of return (IRR), return on investment (ROI), profitability index, and payback]. This case introduces the valuation and comparison of capital investments. With advanced students, the case can be used to review the effects of unequal project lives and uncertain discount rates. Student and instructor worksheet files are available for use with the case and teaching note. Excerpt UVA-F-0813 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 Exhibit1. 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. . . .
Published Version
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