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. The following table shows these estimates.
Project A Project B
Initial investment (CF0) 2$12,200 2$12,200
Outcome Annual cash inflows (CF)
Pessimistic $ 850 $1,550
Most likely 1,650 1,650
Optimistic 2,450 1,750
Soft drinks Snack foods
Initial investment (CF0) 2$5,200 2$5,200
Outcome Annual cash inflows (CF)
Pessimistic $ 500 $ 400
Most likely 750 750
Optimistic 1,000 1,200
a. Determine the range of annual cash inflows for each project.
b. Assume that the firm's cost of capital is 9.3% and that both projects have
15-year lives. Construct a table similar to this one for the NPVs for each project.
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?
I need help figuring the second part B. What formulas can I use to get the answers?
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