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 (CF) Outcome Pessimistic Most likely Optimistic Project A $12,100 Project B $12,100 Annual cash inflows (CF) $860 1,700 2,400 $1,500 1,700 1,790 a. Determine the range of annual cash inflows for each of the two proje b. Assume that the firm's cost of capital is 9.1% and that both projects have 19-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

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 (CF) Outcome Pessimistic Most likely Optimistic Project A $12,100 Project B $12,100 Annual cash inflows (CF) $860 1,700 2,400 $1,500 1,700 1,790 a. Determine the range of annual cash inflows for each of the two proje b. Assume that the firm's cost of capital is 9.1% and that both projects have 19-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

Managerial Accounting

15th Edition

ISBN:9781337912020

Author:Carl Warren, Ph.d. Cma William B. Tayler

Publisher:Carl Warren, Ph.d. Cma William B. Tayler

Chapter12: Capital Investment Analysis

Section: Chapter Questions

Problem 2PA

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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. Initial investment (CFO) Outcome Pessimistic Most likely Optimistic Project A $12,500 Annual cash inflows (CF) $1,590 1,670 1,770 $820 1,670 2,450 Project B $12,500 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? a. The range of annual cash inflows for project A is $ (Round to the nearest…
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 (CF) Outcome Pessimistic Most likely Optimistic Project A $12,200 Annual cash inflows (CF) $1,510 1,660 1,750 $810 1,660 2,420 Project B $12,200 a. Determine the range of annual cash inflows for each of the two projects. b. Assume that the firm's cost of capital is 10.2% 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. a. The range of annual cash inflows for project A is $ (Round to the nearest dollar.)
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 (CF) Outcome Pessimistic Most likely Optimistic Project A $12,100 Annual cash inflows (CF) $830 1,670 2,400 Project B $12,100 a. The range of annual cash inflows for project A is $ $1,530 1,670 1,730 a. Determine the range of annual cash inflows for each of the two projects. b. Assume that the firm's cost of capital is 9.5% and that both projects have 17-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. (Round to the nearest dollar.) ...
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…
O 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 (CF) Outcome Pessimistic Most likely Optimistic Project A $12,500 Annual cash inflows (CF) $890 1,650 2,440 Project B $12.500 (EXER) $1,540 1,650 1,800 a. Determine the range of annual cash inflows for each of the two projects. b. Assume that the firm's cost of capital is 9.3% and that both prolects have 19-vear lives. Construct a table showing the NPVs for
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) $12,900 $12,900 Outcome Annual cash inflows (CF ) Pessimistic $830 $1,540 Most likely 1,690 1,690 Optimistic 2,490 1790 Assume that the firm's cost of capital is 9.1% and that both projects have 18-yearlives. Complete the NPV table below for project A: (Round to the nearest cent.) NPVs Outcome Project A Pessimistic $ Most likely Optimistic Range $ c. Do parts (a)and (b) provide consistent views of the two projects? Explain. d. Which project do you recommend? Why?
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) $12,900 $12,900 Outcome Annual cash inflows (CF ) Pessimistic $830 $1,540 Most likely 1,690 1,690 Optimistic 2,490 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 9.1%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.
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 Celestial Crane Cosmetics 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 $300,000 Year 2 $400,000 Year 3 $450,000 Year 4 $425,000 Celestial Crane Cosmetics’s weighted average cost of capital is 8%, and project Beta has the same risk as the firm’s average project. Based on the cash flows, what is project Beta’s NPV? -$934,674 -$534,674 -$634,674 -$1,121,609 Making the accept or reject decision Celestial Crane Cosmetics’s decision to accept or reject project Beta is independent of its decisions on other projects. If the firm follows the NPV method, it…
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 Blue Hamster Manufacturing Inc. is evaluating a proposed capital budgeting project (project Beta) that will require an initial investment of $3,225,000. The project is expected to generate the following net cash flows: Year Cash Flow Year 1 $375,000 Year 2 $475,000 Year 3 $500,000 Year 4 $500,000 Blue Hamster Manufacturing Inc.'s weighted average cost of capital is 8%, and project Beta has the same risk as the firm's average project. Based on the cash flows, what is project Beta's NPV? O O -$1,331,111 -$1,706,111 -$1,206,111 $1,518,889
Cashflow patterns and the modified rate of return calculation Locke Manufacturing Inc. is analyzing a project with the following projected cash flows: Year Cash Flow 0 -$1,324,800 1 300,000 2 450,000 3 546,000 4 360,000 This project exhibits_________ (pick one- conventional or unconventional) cash flows. Locke’s desired rate of return is 5.00%. Given the cash flows expected from the company's new project, compute the project’s anticipated modified internal rate of return (MIRR). (Hint: Round all dollar amounts to the nearest whole dollar, and your final MIRR value to two decimal places.) choose the correct choice 6.09% 6.47% 6.85% 7.61% Locke’s managers are generally conservative, and select projects based solely on the project’s modified internal rate of return (MIRR). Should the company’s managers accept this independent project? choose the correct choice. Yes No You’ve just learned that…
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…
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 Pheasant Pharmaceuticals is evaluating a proposed capital budgeting project (project Alpha) that will require an initial Investment of $550,000. The project is expected to generate the following net cash flows: Year Year 1 Cash Flow $300,000 Year 2 $500,000 Year 3 Year 4 $500,000 $475,000 Pheasant Pharmaceuticals's weighted average cost of capital is 8%, and project Alpha has the same risk as the firm's average project. Based on the cash flows, what is project Alpha's net present value (NPV)? ○ $1,037,877 O $1,402,502 $902,502 O $352,502 Making the accept or reject decision Pheasant Pharmaceuticals's decision to accept or reject project Alpha is Independent of its decisions on other projects. If the firm follows the NPV method, it should project Alpha. Which of the follow When…