Question

What criteria can be used to rank these projects? Which quantitative ranking method is better and why? Does the ranking differ from an inspection of cash flows? Finally what kinds of investments projects have similar cash flows?

Project Number	1	2	3	4	5	6	7		8	PVF @10%
Initial Investment	$2,000	$2,000	$2,000	$2,000	$2,000	$2,000		$2,000	$2,000
Year 1	$330	$1,666	$	$160	$280	$2,200		$1,200	$(350)	0.909091
2	$330	$334	$	$200	$280			$900	$60	0.826446
3	$330	$165	$	$350	$280			$300	$60	0.751315
4	$330			$395	$280			$90	$350	0.683013
5	$330			$432	$280			$70	$700	0.620921
6	$330			$440	$280				$1,200	0.564474
7	$330			$442	$280				$2,250	0.513158
8	$1,000			$444	$280					0.466507
9				$446	$280					0.424098
10				$448	$280					0.385543
11				$450	$280					0.350494
12				$451	$280					0.318631
13				$451	$280					0.289664
14				$452	$280					0.263331
15			$10,000	$(2,000)	$280					0.239392
Sum of Discounted Cash Flows	$2,073.09	$1,914.55	$    2,393.92	$   2,228.22	$ 2,129.70	$2,000		$ 2,165.04	$ 2,182.98
Discount Profitability Index	1.0365428	0.9572727	1.19696025	1.11411098	1.0648511	1		1.0825204	1.0914922
Rank	5	Reject	1	2	4	Accept/Reject		Reject	3
Order of Priority	3,4,8,5,1,6
Rejected Project	7- Because 7 & 8 are mutually exclusive

Answer 1

What criteria can be used to rank these projects?

Profitability Index is best way to rank, when you have funding contraint and you need to decide the Order of Priority for the projects.

In the above chart, NPV analysis would also have given you same results, since initial investment required for all the projects is same $2000.

Which quantitative ranking method is better and why?

Profitability Index is best way to rank, when you have funding contraint and you need to decide the Order of Priority for the projects. Similarly you could have used NPV method.

Since Profitability Index or NPV method checks whether the Expected returns are greater than required returns unlike IRR method.

Does the ranking differ from an inspection of cash flows?

Obviously it does. Inspection of cashflows ignores the time value impact on cashflows. For finance, time value of money is of atmost importance. $1 now and $1 after 10 years have different values.

Finally what kinds of investments projects have similar cash flows?

Project	Investment type
1	Coupon paying bond
2	some structured product
3	Zero Coupon Bond
4	some structured product
5	Equal Amortized Bond
6	TBill
7	some structured product
8	some structured product