6 Scenario Analysis. The Leaning Tower of Pizza restaurant is attempting to decide which of two new mutually exclusive environmental control systems, A or B, it should install. Each system will produce benefits (e.g. improved productivity and efficiency) over a 10-year period and have an initial cost of £90,000 each. The manager has asked you to assist in the evaluation and has provided the following cash flow and probability estimates:

Initial investment System A

£90,000 System B

£90,000 Estimated outcome Annual cash inflows (£’s)

Optimistic 18,000 21,000 Most likely 15,000 16,000 Pessimistic 12,000 9,000Estimated outcome Probability estimates Optimistic 0.30 0.20 Most likely 0.40 0.60 Pessimistic 0.30 0.20 The finance manager has now asked you to:

(a) calculate the range of annual cash inflows for each system;

(b) calculate the expected NPV for each system using a 10% discount rate;

(c) calculate the range of NPVs for each system and use these to compare the risk of each system;

(d) recommend which system should be purchased and give your reasons.