10. Basic scenario analysis Prime Paints is in the process of evaluating two mutually exclusive additions to its processing capacity. The firm's financial analysts have developed pessimistic, most likely, and optimistic estimates of the annual cash inflows associated with each project. These estimates are shown in the following table. Project A Project B Initial investment (CF) S13,000 $13,000 Outcome Annual cash inflows (CF) Pessimistic $860 $1,570 Most likely 1,840 1,640 Optimistic 2,460 1,720 a. Determine the range of annual cash inflows for each of the two projects. b. Assume that the firm's cost of capital is 9.9% and that both projects have 15-year lives. Construct a table showing the NPVs for each project for each of the possible outcomes. Include the range of NPVs for each project. c. Do parts (a) and (b) provide consistent views of the two projects? Explain. d. Which project do you recommend? Why? a. The range of annual cash inflows for project Ais $ (Round to the nearest dollar.) The range of annual cash inflows for project Bis S (Round to the nearest dollar) b. Assume that the firm's cost of capital is 9.9% and that both projects have 15-year lives. Complete the NPV table below for project A: (Round to the nearest cent.) NPVs Project A $ Outcome Pessimistic Most likely Optimistic Range Complete the NPV table below for project B: (Round to the nearest cent.) NPVs Outcome Project B Pessimistic $ Most likely Optimistic Range $ c. Do parts (a) and (b) provide consistent views of the two projects? Explain. (Select the best answer below.) A. Since the "most likely" outcome is identical for projects A and B, the NPV range is also identical. B. Although the "optimistic" outcome is identical for projects A and B, the NPV range varies considerably. C. Although the "most likely" outcome is identical for projects A and B, the NPV range varies considerably. D. Although the "pessimistic" outcome is identical for projects A and B, the NPV range varies considerably. d. Which project do you recommend? Why? (Select the best answer below.) O A. Project selection would depend upon the risk disposition of the management. (B is more risky than A but also has the possibility of a greater return.) B. Project selection would depend upon the risk disposition of the management. (A is more risky than B but it has the possibility of a lower return.) C. Project selection would depend upon the risk disposition of the management. (A is more risky than B but also has the possibility of a greater return.) D. Project selection would depend upon the risk disposition of the management. (B is more risky than A but it has the possibility of a lower return.)
