The following table describes the projected costs and net benefits for two projects (all values in $ millions.)

Project A Project B Pessimistic Best Guess Optimistic Pessimistic Best Guess Optimistic Year 0 −80 −75 −70 −100 −75 −50 Year 1 −110 −100 −90 −150 −100 −50 Year 2 18 20 22 12 20 28 Year 3 28 30 32 20 30 40 Year 4 28 30 32 25 45 65 Year 5 40 45 50 25 45 65 Year 6 40 45 50 25 45 65 Year 7 40 45 50 25 45 65 Year 8 40 45 50 25 45 65 Year 9 40 45 50 25 45 65 Year 10 55 65 75 35 65 95 i Using the NPV decision rule and assuming a 10% discount rate, which of the two projects would you prefer using the “best guess” estimate of cash flow?

ii Using the available range of estimates apply an ExcelSim© simulation with a triangular distribution (1000 iterations) to derive the following:

a the mean, minimum, and maximum NPVs for each project;

b a graph of the probability distribution of NPVs for each project;

c a graph of the cumulative (ascending) distribution of NPVs for each project.

iii Which project would a risk-averse decision-maker favour, and why? (Assume a 90% confidence level.)

iv Which project would a risk-taking decision-maker favour, and why? (Assume a 20% confidence level.)

v Would your answers to questions (i), (iii) and (iv) be any different if the discount rate was set at:

(a) 5%; and

(b) 15%?