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You are the capital-budgeting analyst for Dubai Holding Co. which is considering investments in the eight projects listed in the table below. The chief financial officer 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 3 and 4 are mutually exclusive.

All the projects require the same initial investment, $40 million. Moreover, all are believed to be of the same risk class. The weighted-average cost of capital of the firm has never been estimated. In the past, analysts have simply assumed that 8 percent was an appropriate discount rate.

To stimulate your analysis, consider the following questions:

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

rank	project	Net present value (NPV)
1	3
2	5
3	8
4	4
5	1
6	7
7	6
8	2

2. Explain the 5 studied quantitative methods (concept, formula, merits, and demerits) and give your opinion which one is the most appropriate.

Project Free Cash Flows (dollars in thousands) Project number: 1 2 3 4 5 6 7 8 Initial investment ($40,000) ($40,000) ($40,000) ($40,000) ($40,000) ($40,000) ($40,000) ($40,000) Year 1 $6,600 $33,320 $0 $3,200 $5,600 $44,000 $24,000 -$7,000 2 $6,600 $6,680 $0 $4,000 $5,600 $0 $18,000 $1,200 3 $6,600 $3,300 $0 $7,000 $5,600 $0 $6,000 $1,200 4 $6,600 $0 SO $7,900 $5,600 $0 $1,800 $7,000 5 $6,600 $0 $0 $8,640 $5,600 $0 $1,400 $14,000 6 $6,600 $0 $0 $8,800 $5,600 $0 $0 $24,000 7 $6,600 $0 SO $8,840 $5,600 $0 $0 $45,000 8 $20,000 $0 $0 $8,880 $5,600 $0 $0 $o 9 $0 $0 $0 $8,920 $5,600 $0 $0 $0 10 $0 $o $0 $8,960 $5,600 $0 $0 $0 11 $0 $0 $0 $9,000 $5,600 $0 $0 $0 12 $0 $0 $0 $9,020 $5,600 $0 $0 $0 13 $0 $0 $0 $9,020 $5,600 $0 $0 $0 14 $0 $0 $0 $9,040 $5,600 $0 $0 $0 15 $200,000 ($40,000) $5,600 $0 $0 $0 $66,200 $43,300 $200,000 $71,220 $84,000 $44,000 $51,200 $83,000 Sum of cash-flow benefits Excess of cash flow over initial investment $26,200 $3,300 $160,000 $31,220 $44,000 $4,000 $11,200 $43,000

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