P124 Basic scenario analysis Murdock Paints is in the process of evaluating two mutually

exclusive additions to its processing capacity. The firms 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.

LG 2

LG 2

LG 2

Soft drinks Snack foods

Initial investment (CF0) 2$3,000 2$3,000

Outcome Annual cash inflows (CF)

Pessimistic $ 500 $ 400

Most likely 750 750

Optimistic 1,000 1,200

Project A Project B

Initial investment (CF0) 2$8,000 2$8,000

Outcome Annual cash inflows (CF)

Pessimistic $ 200 $ 900

Most likely 1,000 1,000

Optimistic 1,800 1,100

a. Determine the range of annual cash inflows for each of the two projects.

b. Assume that the firms cost of capital is 10% and that both projects have 20-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?