The Investment Detective by Robert F.Bruner

the investment detective by robert f. burner

The Investment DetectiveThe essence of capital budgeting and resource allocation is a search for good investmentsin which to place the firm's capital. The process can be simple when viewed in purely me-chanical terms, but a number of subtle issues can obscure the best investment choices. Thecapital-budgeting analyst is necessarily, therefore, a detective who must winnowgood evi-dence from bad. Much of the challenge is knowing what quantitative analysis to generatein the first place.Suppose you are a new capital-budgeting analyst for a company considering invest-ments in the eight projects listed in Exhibit 1. The chief financial officer ofyour com-pany has asked you to rank the projects and recommend the "four best" that the companyshould accept.In this assignment, only the quantitative considerations are relevant. No otherprojectcharacteristics are deciding factors in the selection, except that management has determinedthat projects 7 and 8 are mutually exclusive.All the projects require the same initial investment, $2 million. Moreover, allare be-lieved to be of the same risk class. The weighted-average cost of capital of thefirm hasnever been estimated. In the past, analysts have simply assumed that 10 percentwas an ap-propriate discount