Question
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
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 (CF0) | $12,000 | $12,000 |
| Outcome | Annual cash inflows (CF ) | |
| Pessimistic | $880 | $1,540 |
| Most likely | 1,700 | 1,700 |
| Optimistic | 2,450 | 1,800 |
a. Determine the range of annual cash inflows for each of the two projects.
b. Assume that the firm's cost of capital is 10.6% and that both projects have 18-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?
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Finance And Economics Discussion Series Is Learning By Exporting Important Micro Dynamic Evidence From Colombia Mexico And Morocco
Authors: United States Federal Reserve Board , Sofronis Clerides
1st Edition
1288722362, 9781288722365
