The Investment Detective

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CASE STUDY 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 is necessarily, therefore, a detective who must winnow good evidence from bad. Much of the challenges is knowing what quantitative analysis to generate in the first place. Supposed you are a new capital budgeting analyst for a company considering investments in the eight projects listed in Exhibit 1. The chief financial officer of your company has asked you to rank the projects and recommend the “four…show more content…
Project 2 and 6 are similar to an actual venture capital project where bulk of the cash inflow occurs at the end while some of the inflow is at the beginning. Project 3 is similar to a zero coupon bond where you purchase the bond at a specific price and you receive an big cash outflow at the end of the maturity period. Project 4,7 and 8 are like an investment in a machinery, which generates positive cash for you for a certain period of time. After a while, you can sell that off and receive some more cash. You might have some additional cash outflows initially to get the machinery going (training etc.). Project 5 is similar to an annuity. Part II 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

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