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)OutcomePessimisticMost likelyOptimisticProject A$12,800Annual cash inflows (CF)$8601,6102.480Project B$12,800a. The range of annual cash inflows for project A is $$1,5201,6101,740a. 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 18-year lives. Construct a table showing the NPVs for each project for each of the possible outcomes. Include the range ofNPVS for each project.(Round to the nearest dollar.)

In order to calculate range of project we calculate the total cash flow of the project which is most…

. Determine the range of annual cash inflows for each of the two projects. . Assume that the firm's cost of capital is 10.3% 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 HPVS for each project.

. Determine the range of annual cash inflows for each of the two projects. . Assume that the firm's cost of capital is 10.3% 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 HPVS 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 (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 (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. 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?
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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
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…
Cash Flow estimation Question Shultz Business Systems is analyzing an average-risk project, and the following data have been developed. Unit sales will be constant, but the sales price should increase with inflation. Fixed costs will also be constant, but variable costs should rise with inflation. The project should last for 3 years, it will be depreciated on a straight-line basis, and there will be no salvage value. This is just one of many projects for the firm, so any losses can be used to offset gains on other firm projects. What is the project's expected NPV? Project cost of capital (r) 10.0% Net investment cost (depreciable basis) $200,000 Units sold 50,000 Average price per unit, Year 1 $25.00 Fixed op. cost excl. deprec. (constant) $150,000 Variable op. cost/unit, Year 1 $20.20 Annual depreciation rate 33.333% Expected inflation rate per year 5.00% Tax rate 40.0% a. $15,925 b. $16,764 c.…