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-year lives. 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 1790 Assume that the firm's cost of capital is 9.1% and that both projects have 18-year lives. 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?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter11: Capital Budgeting And Risk

Section: Chapter Questions

Problem 23P

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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…
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.
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