In these cases only acceptable projects should be

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Unformatted text preview: ating mutually exclusive projects, or in a situation in which capital must be rationed. In these cases, only acceptable projects should be considered. The second method, the ranking approach, involves ranking projects on the basis of some predetermined measure, such as the rate of return. The project with the highest return is ranked first, and the project with the lowest return is ranked last. Only acceptable projects should be ranked. Ranking is useful in selecting the “best” of a group of mutually exclusive projects and in evaluating projects with a view to capital rationing. Conventional versus Nonconventional Cash Flow Patterns conventional cash flow pattern An initial outflow followed only by a series of inflows. nonconventional cash flow pattern An initial outflow followed by a series of inflows and outflows. Cash flow patterns associated with capital investment projects can be classified as conventional or nonconventional. A conventional cash flow pattern consists of an initial outflow followed only by a series of inflows. For example, a firm may spend $10,000 today and as a result expect to receive equal annual cash inflows (an an...
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