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Determining the asset cost or initial investment is a crucial first step in the procedure for ranking potential investments. Before any analysis of cash flows can take place, it is essential to establish the total cost involved in acquiring the asset or undertaking the investment. This initial investment cost lays the foundation for evaluating the future cash flows that the investment is expected to generate.

Once the cost is determined, it can be compared against the estimated cash flows and potential returns from the investment. This step ensures that all calculations in subsequent phases are anchored in accurate and relevant financial commitments. By having a clear understanding of the asset cost, an investor can better assess the profitability and financial viability of various investments in relation to their expenditures.

The ranking of investments and the evaluation of cash flows follow this foundational step of determining the investment cost, making it a logical starting point in any investment analysis.