Synopsis and Objectives

This case presents the cash flows of eight unidentified investments, all of equal initial investment size. The task is to rank the projects. The first objective of the case is to examine critically the principal capital-budgeting criteria. A second objective is to consider the problem that arises when net present value (NPV) and internal rate of return (IRR) disagree as to the ranking of two mutually exclusive projects. Finally, the case is a vehicle for introducing the problem created by attempting to rank projects of unequal life and the solution to that difficulty—the equivalent-annuity criterion.

(Questions for this case are on page 257)

THE INVESTMENT DETECTIVE
Comparative Analysis of Investments

1. Project free cash flows (in thousands of dollars)

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 $2,2001 $1,200 $(350)
2 330 3341 200 280 9001 (60)
3 330 $ 165 350 280 300 60
4 330 395 280 90 350
5 330 432 280 $ 70 700
6 330 4401 280 1,200
7 3301 442 280 $2,2501
8 $1,000 444 2801
9 446 280
10 448 280
11 450 280
12 451 280
13 451 280
14 452 280
15 $10,0001 $(2,000) $ 280
Synopsis and Objectives

This case presents the cash flows of eight unidentified investments, all of equal initial investment size. The task is to rank the projects. The first objective of the case is to examine critically the principal capital-budgeting criteria. A second objective is to consider the problem that arises when net present value (NPV) and internal rate of return (IRR) disagree as to the ranking of two mutually exclusive projects. Finally, the case is a vehicle for introducing the problem created by attempting to rank projects of unequal life and the solution to that difficulty—the