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. These estimates are shown in the following table. Project A Project B Initial investment (CF0) $12,500 $12,500 Outcome Annual cash inflows (CF ) Pessimistic $820 $1,530 Most likely 1,600 1,600 Optimistic 2,410 1,760 a. Determine the range of annual cash inflows for each of the two projects. b. Assume that the firm's cost of capital is 10.3% 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?
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. These estimates are shown in the following table. Project A Project B Initial investment (CF0) $12,500 $12,500 Outcome Annual cash inflows (CF ) Pessimistic $820 $1,530 Most likely 1,600 1,600 Optimistic 2,410 1,760 a. Determine the range of annual cash inflows for each of the two projects. b. Assume that the firm's cost of capital is 10.3% 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?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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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. These estimates are shown in the following table.
|
|
Project A
|
Project B
|
|
Initial investment
(CF0)
|
$12,500
|
$12,500
|
|
Outcome
|
Annual cash inflows
(CF )
|
|
|
Pessimistic
|
$820
|
$1,530
|
|
Most likely
|
1,600
|
1,600
|
|
Optimistic
|
2,410
|
1,760
|
a. Determine the range of annual cash inflows for each of the two projects.
b. Assume that the firm's cost of capital is
10.3%
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?
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