P12-14 Basic scenario analysis Aluminum Projects is in the process of evaluating two new aluminum cutting machines with the intention of purchasing one of them. The firm's financial analysts have developed pessimistic, most likely, and optimistic estimates of the annual cash inflows for the two machines, which are shown in the following table. Initial investment (CF0) Outcome Pessimistic Most likely Optimistic Machine A $5,000 Machine B $5,500 Annual cash inflows (CF) $ 550 $ 850 $ 950 $1,050 $1,350 $1,200 a. Determine the range of annual cash inflows for each machine. b. Assume that firm's cost of capital is 10% and that both machines have 12-year lives. Construct a table similar to this one for the NPVs for each machine. Include the range of NPVs for each machine. c. Based on the range of the cash flows and the NPVs of each machine, which machine should be acquired? d. Which machine should the firm invest in if it is not willing to take risks? Why?
P12-14 Basic scenario analysis Aluminum Projects is in the process of evaluating two new aluminum cutting machines with the intention of purchasing one of them. The firm's financial analysts have developed pessimistic, most likely, and optimistic estimates of the annual cash inflows for the two machines, which are shown in the following table. Initial investment (CF0) Outcome Pessimistic Most likely Optimistic Machine A $5,000 Machine B $5,500 Annual cash inflows (CF) $ 550 $ 850 $ 950 $1,050 $1,350 $1,200 a. Determine the range of annual cash inflows for each machine. b. Assume that firm's cost of capital is 10% and that both machines have 12-year lives. Construct a table similar to this one for the NPVs for each machine. Include the range of NPVs for each machine. c. Based on the range of the cash flows and the NPVs of each machine, which machine should be acquired? d. Which machine should the firm invest in if it is not willing to take risks? Why?
Chapter1: Taking Risks And Making Profits Within The Dynamic Business Environment
Section: Chapter Questions
Problem 1CE
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Question
Basic scenario analysis Aluminum Projects is in the process of evaluating two new
aluminum cutting machines with the intention of purchasing one of them. The firm’s
financial analysts have developed pessimistic, most likely, and optimistic estimates of
the annual
a. Determine the range of annual cash inflows for each machine.
b. Assume that firm’s cost of capital is 10% and that both machines have 12-year
lives. Construct a table similar to this one for the NPVs for each machine.
Include the range of NPVs for each machine.
c. Based on the range of the cash flows and the NPVs of each machine, which
machine should be acquired?
d. Which machine should the firm invest in if it is not willing to take risks? Why?
Transcribed Image Text:P12-14 Basic scenario analysis Aluminum Projects is in the process of evaluating two new
aluminum cutting machines with the intention of purchasing one of them. The firm's
financial analysts have developed pessimistic, most likely, and optimistic estimates of
the annual cash inflows for the two machines, which are shown in the following table.
Initial investment (CF0)
Outcome
Pessimistic
Most likely
Optimistic
Machine A
$5,000
Machine B
$5,500
Annual cash inflows (CF)
$ 550
$ 850
$ 950
$1,050
$1,350
$1,200
a. Determine the range of annual cash inflows for each machine.
b. Assume that firm's cost of capital is 10% and that both machines have 12-year
lives. Construct a table similar to this one for the NPVs for each machine.
Include the range of NPVs for each machine.
c. Based on the range of the cash flows and the NPVs of each machine, which
machine should be acquired?
d. Which machine should the firm invest in if it is not willing to take risks? Why?
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