Question

You have just been hired to analyze the following projects for a start-up company. The CEO 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. All projects are believed to similarly risky. The firms' 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. Rank the projects using payback period. 2. Rank the projects using ROI. 3. Rank the projects using NPV

Answer 1

	Cashflows										Discounting Factor	Discounted Cashflows
Year	-10000	-10000	-10000	-10000	-10000	-10000	-10000	-10000	-20000	-40000	1.00	-10,000	-10,000	-10,000	-10,000	-10,000	-10,000	-10,000	-10,000	-20,000	-40,000
1	1650	8330	0	800	1400	11000	6000	-25000	0	15000	0.91	1,500	7,573	-	727	1,273	10,000	5,455	-22,727	-	13,636
2	1650	1670	0	1000	1400	0	4500	500	0	6000	0.83	1,364	1,380	-	826	1,157	-	3,719	413	-	4,959
3	1650	825	0	1750	1400	0	1500	5000	5250	5000	0.75	1,240	620	-	1,315	1,052	-	1,127	3,757	3,944	3,757
4	1650		0	1975	1400	0	450	10000	5250	5000	0.68	1,127	-	-	1,349	956	-	307	6,830	3,586	3,415
5	1650		0	2160	1400	0	350	12500	5250	7000	0.62	1,025	-	-	1,341	869	-	217	7,762	3,260	4,346
6	1650		0	2200	1400	0	0	15000	5250	10000	0.56	931	-	-	1,242	790	-	-	8,467	2,963	5,645
7	1650		0	2210	1400	0	0	17500	5250	15000	0.51	847	-	-	1,134	718	-	-	8,980	2,694	7,697
8	5000		0	2220	1400	0	0	20000	5250	0	0.47	2,333	-	-	1,036	653	-	-	9,330	2,449	-
9			0	2230	1400	0	0	0	5250	0	0.42	-	-	-	946	594	-	-	-	2,227	-
10			0	2240	1400	0	0	0	5250	0	0.39	-	-	-	864	540	-	-	-	2,024	-
11			0	2250	1400	0	0	0	0	0	0.35	-	-	-	789	491	-	-	-	-	-
12			0	2255	1400	0	0	0	0	0	0.32	-	-	-	719	446	-	-	-	-	-
13			0	2255	1400	0	0	0	0	0	0.29	-	-	-	653	406	-	-	-	-	-
14			0	2260	1400	0	0	0	0	0	0.26	-	-	-	595	369	-	-	-	-	-
15			50000	-10000	1400	0	0	0	0	0	0.24	-	-	11,970	-2,394	335	-	-	-	-	-
											NPV	365	-427	1,970	1,141	649	-	825	12,812	3,147	3,455
											Ranking based on NPV	8	10	4	5	7	9	6	1	3	2

Pay Back period	6 Yr 1 month	2 Years	14 Yr 3 months	11 Yr	7 Yr 2 months	11 months	1 yr 11 months	5 Yr 6 months	5 Yr 10 moths	5 yr 3 months
Ranking	7	3	10	9	8	1	2	5	6	4
Return	6550	825	40000	7805	11000	1000	2800	45500	22000	23000
Investment	10000	10000	10000	10000	10000	10000	10000	10000	20000	40000
	65.5	8.25	400	78.05	110	10	28	455	110	57.5
Ranking	6	10	2	5	4	9	8	1	3	7