Question

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​)	​$12,400	​$12,400
Outcome	Annual cash inflows ​(CF ​)
Pessimistic	​$840	​$1,560
Most likely	1,650	1,650
Optimistic	2,450	1,740

a. Determine the range of annual cash inflows for each of the two projects.

b. Assume that the​ firm's cost of capital is 9.2% 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.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 ​$16101610.

​(Round to the nearest​ dollar.)The range of annual cash inflows for project B is $180180.

​ (Round to the nearest​ dollar.)b. Assume that the​ firm's cost of capital is 9.2% and that both projects have 19​-year lives. Complete the NPV table below for project​ A:  ​(Round to the nearest​ cent.)

NPVs
Outcome	Project A
Pessimistic	$	–
Most likely		2,166.00
Optimistic
Range	$

Answer 1

Requirement a

Range = Highest value - Lowest value
	Cash inflows
Outcome	Project A	Project B
Pessimistic	840	1560
Most likely	1,650	1,650
Optimistic	2,450	1,740
Range =	1,610	180

Requirement b

Computation of NPV for different projects

Project A

Pessimistic:		Most likely:		Optimistic:
Rate =	9.2%	Rate =	9.2%	Rate =	9.2%
Nper =	19	Nper =	19	Nper =	20
PMT =	-800	PMT =	-1,650	PMT =	-2,450
PV =?		PV =?		PV =?
PV =	$7,062.33	PV =	$14,566.05	PV =	$22,049.80
Cash outflow =	-12,400	Cash outflow =	-12,400	Cash outflow =	-12,400
NPV =	($5,337.67)	NPV =	$2,166.05	NPV =	$9,649.80

Project B

Pessimistic:		Most likely:		Optimistic:
Rate =	9.2%	Rate =	9.2%	Rate =	9.2%
Nper =	19	Nper =	19	Nper =	20
PMT =	-1560	PMT =	-1,650	PMT =	-1,740
PV =?		PV =?		PV =?
PV =	$13,771.54	PV =	$14,566.05	PV =	$15,659.86
Cash outflow =	-12,400	Cash outflow =	-12,400	Cash outflow =	-12,400
NPV =	$1,371.54	NPV =	$2,166.05	NPV =	$3,259.86

	NPVs
Outcome	Project A	Project B
Pessimistic	($5,337.67)	$1,371.54
Most likely	2,166.05	2,166.05
Optimistic	9,649.80	3,259.86
Range = Optimistic - Pessimistic	14,987	1,888

Requirement c

Both the projects provide consistent views as return requirement and tenure of project is same. However, project A is riskier than Project B

Requirement d

This would be dependent on risk taking requirement of the investor. If company wants high returns, greater risk needs to be taken. Then, the company shall choose Project A as NPV is higher. Likewise, low risk returns would equate to selection of Project B as there is less deviation.

kindly upvote