Question
Basic scenario analysis Prime Paints is in the process of evaluating two mutually exclusive additions to its processing capacity. Thefirm's financial analysts have developedpessimistic, mostlikely,
Basic scenario analysis Prime Paints is in the process of evaluating two mutually exclusive additions to its processing capacity. Thefirm's financial analysts have developedpessimistic, mostlikely, 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 0CF0)
$13,000
$13,000
Outcome
Annual cash inflows
(CFCF)
Pessimistic
$840
$1 1,580
Most likely
1,680
1,680
Optimistic
2,460
1,740
a. Determine the range of annual cash inflows for each of the two projects.
b. Assume that thefirm's cost of capital is 9.2 %9.2% and that both projects have 17-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 twoprojects? Explain.
d. Which project do yourecommend? Why?
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