Question
o 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,
o 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) | $12,300 | $12,300 |
Outcome | Annual cash inflows (CF ) | |
Pessimistic | $850 | $1,550 |
Most likely | 1,700 | 1,700 |
Optimistic | 2,460 | 1,790 |
a. Determine the range of annual cash inflows for each of the two projects.
b. Assume that the firm's cost of capital is
9.4%
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?
Question content area bottom
Part 1
a. The range of annual cash inflows for project A is
$16101610.
(Round to the nearest dollar.)
Part 2
The range of annual cash inflows for project B is
$240240.
(Round to the nearest dollar.)
Part 3
b. Assume that the firm's cost of capital is
9.4%
and that both projects have
15-year
lives. Complete the NPV table below for project A:(Round to the nearest cent.)
NPVs | ||||
Outcome | Project A | |||
Pessimistic | $ |
| ||
Most likely |
|
| ||
Optimistic |
|
| ||
Range | $ |
|
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