Can You Rank the Projects Simply by Inspecting the Cash Flows?

1. Can you rank the projects simply by inspecting the cash flows?

The projects can't be ranked just simply by inspecting the cash flows. In order to rank the projects we must bring all cash flows to the same point in time (present) before we can even compare. This must be done first because of time value of money. If a dollar is received now it is more valuable than a dollar that would be received sometime in the near future. In saying that the cash flows must be brought to present before we can even start to rank the projects.

2. What criteria might you use to rank the projects? Which quantitative ranking methods are better? Why?

Looking at the projects there are several criteria that can be used to rank the projects, such as using the projects IRR, Payback period and NPV. NPV results in the best ranking because IRR only works if there is a series of cash flows that shows results in an initial outlay followed by future inlay. Any sequence of cash flows that does not support this, will not yield accurate results with the IRR method. Also, IRR just gives a percentage, which will ignore the magnitude of cash flows. Payback period plainly ignores the time value of money, which is considered to be a major flaw of this methodology. All of the drawbacks of IRR and Payback period, NPV is usually the best method for capital budgeting.

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?

The rankings that I found by using the quantitative methods are as followed:

Projects ranked by using NPV methods

1) Project 6 2) Project 2 3) Project 7 4) Project 4

Projects ranked by using IRR method

1) Project