Basic scenario analysis Prime Paints is in the process of evaluating two mutually exclusive additions to itsprocessing capacity. The firm's financial analysts have developed pessimistic, most likely, and optimistic estimates ofthe annual cash inflows associated with each project. These estimates are shown in the following table.Initial investment (CFO)OutcomePessimisticMost likelyOptimisticProject A$12,500Annual cash inflows (CF)$1,5901,6701,770$8201,6702,450Project B$12,500a. Determine the range of annual cash inflows for each of the two projects.b. Assume that the firm's cost of capital is 9.8% and that both projects have 18-year lives. Construct a table showingthe 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?a. The range of annual cash inflows for project A is $(Round to the nearest dollar.)

Here, Project AProject BInitial Investment $ 12,500.00 $ 12,500.00OutcomeAnnual Cash…

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. Initial investment (CFO) Outcome Pessimistic Most likely Optimistic Project A $12,500 Project B $12,500 Annual cash inflows (CF) $1,590 1,670 1,770 $820 1,670 2,450 a. Determine the range of annual cash inflows for each of the two projects. b. Assume that the firm's cost of capital is 9.8% and that both projects have 18-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. Initial investment (CFO) Outcome Pessimistic Most likely Optimistic Project A $12,500 Project B $12,500 Annual cash inflows (CF) $1,590 1,670 1,770 $820 1,670 2,450 a. Determine the range of annual cash inflows for each of the two projects. b. Assume that the firm's cost of capital is 9.8% and that both projects have 18-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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Unequal lives-ANPV approach Portland Products is considering the purchase of one of three mutually exclusive projects for increasing production efficiency. The firm plans to use a 13.1% cost of capital to evaluate these equal-risk projects. The initial investment and annual cash inflows over the life of each project are shown in the following table. (Click on the icon here in order to copy the contents of the data table below into a spreadsheet.) Initial investment (CF) Year (t) 1 2345678 u. VUIMMU BIV TRE Project X $78,000 $16,700 25,100 33,000 40,800 PETIT. Project X Project Z Project Y Project Y $52,000 Cash inflows (CF) $27,800 38,200 a. Calculate the NPV for each project over its life. Rank the projects in descending order on the basis of NPV. b. Use the annualized net present value (ANPV) approach to evaluate and rank the projects in descending order on the basis of ANPV c. Compare and contrast your findings in parts (a) and (b). Which project would you recommend that the firm…
Payback Period, IRR, and Minimum Cash Flows The management of Mesquite Limited is currently evaluating the following investment proposal: Year 4 Initial investment $260,000 Net operating cash inflows Time 0 Year 1 Year 2 Year 3 -- $100,000 $100,000 $100,000 $100,000 (a) Determine the proposal's payback period. 2.6 years % (b) Determine the proposal's internal rate of return. (Refer to Appendix 24B if you use the table approach.) (c) Given the amount of the initial investment, determine the minimum annual net cash inflows required to obtain an internal rate of return of 16 percent. Round the answer to the nearest dollar. $
Net Present Value Analysis; Uncertain Cash Flows “I’m not sure we should lay out $250,000 for that automated welding machine,” said Jim Alder, president of the Superior Equipment Company. “That’s a lot of money, and it would cost us $80,000 for software and installation, and another $36,000 per year just to maintain the thing. In addition, the manufacturer admits it would cost $45,000 more at the end of three years to replace worn-out parts.” “I admit it’s a lot of money.” said Franci Rogers, the controller. “But you know the turnover problem we’ve had with the welding crew. This machine would replace six welders at a cost savings of $108,000 per year. And we would save another $6,500 per year in reduced material waste. When you figure that the automated welder would last for six years, I’m sure the return would be greater than our 16% required rate of return.” “I’m still not convinced,” countered Mr. Alder. “We can only get $12,000 scrap value out of our old welding equipment if we…
1. Net present value (NPV) Evaluating cash flows with the NPV method The net present value (NPV) rule is considered one of the most common and preferred criteria that generally lead to good investment decisions. Consider this case: Suppose Cold Goose Metal Works Inc. is evaluating a proposed capital budgeting project (project Beta) that will require an initial investment of $2,225,000. The project is expected to generate the following net cash flows: Year Cash Flow Year 1 $375,000 Year 2 $500,000 Year 3 $475,000 Year 4 $500,000 Cold Goose Metal Works Inc.’s weighted average cost of capital is 10%, and project Beta has the same risk as the firm’s average project. Based on the cash flows, what is project Beta’s NPV? -$2,997,487 -$297,487 -$888,360 -$772,487 Making the accept or reject decision Cold Goose Metal Works Inc.’s decision to accept or reject project Beta is independent of its decisions on other projects. If…
Tips ips Project Cash Flow The financial staff of Cairn Communications has identified the following information for the first year of the roll-out of its new proposed service: Projected sales Operating costs (not including depreciation) Depreciation $24 million $11 million $4 million Interest expense $5 million The company faces a 25% tax rate. What is the project's operating cash flow for the first year (t = 1)? Enter your answer in dollars. For example, an answer of $1.2 million should be entered as $1,200,000. Round your answer to the nearest dollar.
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Solve Part B of the question
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Evaluating cash flows with the NPV method The net present value (NPV) rule is considered one of the most common and preferred criteria that generally lead to good investment decisions. Consider this case: Suppose Hungry Whale Electronics is evaluating a proposed capital budgeting project (project Beta) that will require an initial investment of $3,000,000. The project is expected to generate the following net cash flows: Year Cash Flow Year 1 $300,000 Year 2 $425,000 Year 3 $500,000 Year 4 $475,000 Hungry Whale Electronics’s weighted average cost of capital is 7%, and project Beta has the same risk as the firm’s average project. Based on the cash flows, what is project Beta’s NPV? -$1,152,891 -$1,814,575 -$1,577,891 -$4,577,891 Making the accept or reject decision Hungry Whale Electronics’s decision to accept or reject project Beta is independent of its decisions on other projects. If the firm follows the NPV method, it…
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QUESTION 34 Red Hill Technologies is considering two potential projects, X and Y. In assessing the projects' risks, the company estimated the beta of each project versus both the company's other assets and the stock market, and it also conducted thorough scenario and simulation analyses. This research produced the following data: Expected NPV Standard deviation (ONPV) Project beta (vs. market) Correlation of the project cash flows with cash flows from currently existing projects Project X $350,000 $100,000 1.4 Cash flows are not correlated with the cash flows from existing projects Which of the following statements is CORRECT? Project Y $350,000 $150,000 0.8 Cash flows are highly correlated with the cash flows from existing projects a. Project X has more stand-alone risk than Project Y. O b. Project X has more corporate (or within-firm) risk than Project Y. O c. Project X has more market risk than Project Y. O d. Project X has the same level of corporate risk as Project Y. O e. Project…

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