As the financial manager, what information about these projects would you need?
This week considered comparing investment projects (cash flow streams) using financial calculations. It is important to note that it is not an exact science when using these calculations (rules) in determining whether to take on a project or investment. For example, the largest Net Present Value (NPV) may not be the best investment for the firm.
For this discussion post, assume that you are a financial manager at a commercial construction firm. There are three multi-year projects your firm could contract with. The projects under consideration include construction of a hospital, a school, or a retail outlet. Unfortunately, your firm only has enough resources to take on two of these projects. As the financial manager, the firm is looking for you to select the best two projects to contract.
You will want to consider Net Present Value (NPV), Internal Rate of Return (IRR), Payback Period, and Profitability Index. Please respond to the following questions:
1. As the financial manager, what information about these projects would you need? Consider some of the variables included to calculate rules listed above.
2. As a financial manager, are there other variables that should be considered? This could include qualitative type data. For example, other risk factors might impact your decision, that are not quantified in the rules above.
3. Select two of the rules described above that would heavily influence your conclusion. Given the construction industry and three projects, how might the advantages and disadvantages of these rules impact your decision?