Basic scenario analysis ??Prime Paints is in the process of evaluating two mutually exclusive additions to...

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Finance

Basic scenario analysis ??Prime Paints is in the process ofevaluating two mutually exclusive additions to its processingcapacity. The? firm's financial analysts havedeveloped?pessimistic, most? likely, and optimistic estimates ofthe annual cash inflows associated with each project. Theseestimates are shown in the following table.
Project A
Project B
Initial investment
?(CF 0CF0?)
?$12,800
?$12,800
Outcome
Annual cash inflows
?(CFCF ?)
Pessimistic
?$860
?$1,530
Most likely
1,680
1,680
Optimistic
2,500
1,780
a. Determine the range of annual cash inflows for each of thetwo projects.
b. Assume that the? firm's cost of capital is 10.4% and thatboth projects have 17?-year
lives. Construct a table showing the NPVs for each project foreach of the possible outcomes. Include the range of NPVs for eachproject.
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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3.7 Ratings (501 Votes)

Ans a Range of annual cash inflows for each of the two projects Range is the difference between highest and lowest value in the data set Project A Range of Project A Highest Lowest 2500 860 1640 Project Lifetime Range 1640 17 No of Years 27880 Project B Range of Project B Highest Lowest 1780 1530 250 Project Lifetime Range 250 17 No of See Answer

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Basic scenario analysis ??Prime Paints is in the process ofevaluating two mutually exclusive additions to its processingcapacity. The? firm's financial analysts havedeveloped?pessimistic, most? likely, and optimistic estimates ofthe annual cash inflows associated with each project. Theseestimates are shown in the following table.Project AProject BInitial investment?(CF 0CF0?)?$12,800?$12,800OutcomeAnnual cash inflows?(CFCF ?)Pessimistic?$860?$1,530Most likely1,6801,680Optimistic2,5001,780a. Determine the range of annual cash inflows for each of thetwo projects.b. Assume that the? firm's cost of capital is 10.4% and thatboth projects have 17?-yearlives. Construct a table showing the NPVs for each project foreach of the possible outcomes. Include the range of NPVs for eachproject.c. Do parts ?(a?) and ?(b?)provide consistent views of the two? projects? Explaind. Which project do you? recommend? Why?

	Project A	Project B
Initial investment ?(CF 0CF0?)	?$12,800	?$12,800
Outcome	Annual cash inflows ?(CFCF ?)
Pessimistic	?$860	?$1,530
Most likely	1,680	1,680
Optimistic	2,500	1,780