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t is possible to rank the projects by looking at the cash flows

Sociology

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t is possible to rank the projects by looking at the cash flows. However, the ranking obtained may not be accurate. The key reason why ranking the projects by observing the cash flows is unlikely to be right is that we are not considering the time value of money i.e, money received today (inflows) is more valuable than an equivalent amount of money received in the following year. The depreciation in the value of money arises mainly due to the general rise in the prices in an economy. However, by observing the cash flows Exhibit 3 appears to be the best since the inflow is far higher than the initial investment and the excess cash flows is the highest among all Exhibits. 2. Since the projects involve cash flows of different amounts at different points of time, an ideal quantitative method for ranking cash flow is by calculating the Net Present Value of the projects. The Net present value of a project is calculated by discounting the cash flows of the projects and subtracting the initial investment from the amount obtained. Another alternative is to utilize the Internal Rate of Return, which provides the returns (in percentage terms) of the projects. However, the IRR method is ineffective when projects have multiple outflows (as in the case of projects 4 and 8). We can also utilize the payback period which is the time required for the inflows to equal the initial investment. In the exhibits given, the payback periods of the projects are marked with an asterisk. A more accurate version of payback would be the discounted payback