How did they find the interest?

353 A Range of Estimates and a pessimistie decision is and pessimistic esti scenarit estimates are often used to form optimistic, most likely, and pessimistic estimate. Ten, sensitive to the range of projected values. Sets of such optimistic, the economic analysis can determine whether the most likely, scenarios EXAMPLE 10-1 A firm is considering an investment. The most likely data values were found during the feasibility srudy. Analyzing past data of similar projects shows that optimistic values for the first cost and annual benefit are 5% better than most likely values. Pessimistic values are 15% worse. The firm's most experienced project analyst has estimated the values for the useful life and salvage value. Note that 5% better and 15% worse is not +5% and-15% for cost. A lower cost is better and a higher cost is worse. Optimistic Most Likely Cost Net annual benefit Salvage value Useful life, in years S950 $1000 200 $1150 170 0 100 12 10 the rate of return for each estimate. If &forg before-tax minimum attractive rate of is required, is the investment justified under all three estimates? If it is justified only some estimates, how can these results be used? under SOLUTION Solve for Answer 19,8 Most L 4 Pessimistic 1000 1150 39% 170 To solve with tabulated factors, the equations for the respective cases are: Optimistic PW 0-$950 +210(P/A, IRRopt 12) +100(P/F, IRRopt. 12) Most Likely PW = 0 =-$1000 + 200(P/A. IRRmost likely, 10) 5 (P/A, IRRmost likely. 10) 1000/200 Pessimistic PW-0--$1150+170(P/A. IRRpess 8) (P/A. IRRpess. 8) 1150/170 6.76