A corporation is assessing the risk of two capital budgeting proposals. The financial analysts have developed...

A corporation is assessing the risk of two capital budgeting proposals. The financial analysts have developed pessimistic, most likely, and optimistic estimates of the annual cash inflows which are given in the following table below. The firm’s cost of capital is 10 percent. If the projects have five-year lives, the range of the net present value for Project B is approximately __________.

Project A:			Project B:
Initial Investment:	Annual Cash Inflow:	Outcome:	Initial Investment:	Annual Cash Inflow:	Outcome:
$20,000	$5,000	Pessimistic	$100,000	$20,000	Pessimistic
	$10,000	Most Likely		$40,000	Most Likely
	$15,000	Optimistic		$100,000	Optimistic

$254,894
$37,908
$303,263
$80,000

Expert Solution

Range of NPV = NPV@Optimistic - NPV @Pessimistic

NPV = PV of Cash Inflows - PV of Cash Outflows

NPV@Optimistic :

Year	CF	PVF @10%	Disc CF
0	$ -1,00,000.00	1.0000	$ -1,00,000.00
1	$ 1,00,000.00	0.9091	$ 90,909.09
2	$ 1,00,000.00	0.8264	$ 82,644.63
3	$ 1,00,000.00	0.7513	$ 75,131.48
4	$ 1,00,000.00	0.6830	$ 68,301.35
5	$ 1,00,000.00	0.6209	$ 62,092.13
NPV			$ 2,79,078.68

NPV@Pesimistic:

Year	CF	PVF @10%	Disc CF
0	$ -1,00,000.00	1.0000	$ -1,00,000.00
1	$ 20,000.00	0.9091	$ 18,181.82
2	$ 20,000.00	0.8264	$ 16,528.93
3	$ 20,000.00	0.7513	$ 15,026.30
4	$ 20,000.00	0.6830	$ 13,660.27
5	$ 20,000.00	0.6209	$ 12,418.43
NPV			$ -24,184.26

Range of NPV = NPV@Optimistic - NPV @Pessimistic

= 279078.68 - (-24184.26)

= $ 303,262.94

OPtion C is correct.

jeff jeffy answered 8 months ago

A corporation is assessing the risk of two capital budgeting proposals. The financial analysts have developed pessimistic, most likely

A corporation is assessing the risk of two capital budgeting proposals. The financial analysts have developed pessimistic, most likely, and optimistic estimates of the annual cash inflows which are given in the following table. The firm’s cost of capital is 10 percent. Project AInitial Investment$20,000Annual Cash Inflow; Outcome$5,000; Pessimistic10,000; Most likely15,000; Optimistic Project BInitial Investment$100,000Annual Cash Inflow; Outcome$20,000; Pessimistic40,000; Most likely100,000; Optimistic Questions:The expected net present value of project A if the outcomes are equally probable and the project has...

1. When assessing a company's credit risk: Multiple Choice Analysts use only financial ratios and do...

1. When assessing a company's credit risk: Multiple Choice Analysts use only financial ratios and do not need to review the statement of cash flows. Analysts use only the statement of cash flows. Both liquidity and solvency must be reviewed. The assessment involves looking only at the operating and cash conversion cycles. 2.The accounts receivable turnover ratio Multiple Choice is not useful in determining changes in customer payment patterns. uses total sales and not just credit sales in the computation....

Capital Budgeting and Risk Analysis Define the most important capital budgeting techniques. name at least two...

Capital Budgeting and Risk Analysis Define the most important capital budgeting techniques. name at least two (2) capital budgeting techniques (e.g., NPV, IRR, Payback Period, etc.) that you used to arrive investment decision.

The following data have been collected by capital budgeting analysts at Halda, Inc. concerning an investment...

The following data have been collected by capital budgeting analysts at Halda, Inc. concerning an investment in an expansion of the company's product line. Analysts estimate that an investment of $210,000 will be required to initiate the project at the beginning of 2016. Estimated cash returns from the new product line are summarized in the following table; assume that the returns will be received in lump sum at the end of each year. Year Amount of Cash Return 2019 $...

The following data have been collected by capital budgeting analysts at Sunset Beach Inc. concerning an...

The following data have been collected by capital budgeting analysts at Sunset Beach Inc. concerning an investment in an expansion of the company's product line. Analysts estimate that an investment of $475,000 will be required to initiate the project at the beginning of 2019. The estimated cash returns from the new product line are summarized in the following table; assume that the returns will be received in a lump sum at the end of each year: Table 6-4. (Use appropriate...

Working Capital Management and Capital Budgeting are two functions of the financial manager. Explain which of...

Working Capital Management and Capital Budgeting are two functions of the financial manager. Explain which of these two functions you believe is most important for the financial manager of a small business. (minimum 200 words)

how does financial markets risk, risk, rate of return connects to WACC, capital budgeting, equity valuation...

how does financial markets risk, risk, rate of return connects to WACC, capital budgeting, equity valuation and financing concepts? Provide specific examples

8. Discuss the two methods used to incorporate risk into capital budgeting decisions.

A film must choose from six capital budgeting proposals outlined below.

1718A film must choose from six capital budgeting proposals outlined below. The firm is subject to capital rationing and has a capital budget of $1,000,000, the firm's cost of capital is 15 percent. A firm must choose from six capital budgeting proposals outlined below. The firm is subject to capital rationing and has a capital budget of $1.000.000, the few's cost of capital is 15 percentThe internal rate of return assumes that intermediate cash inflows are invested at a rate...

Chapter 13 introduces risk as a capital budgeting factor. As we build on capital budgeting from...

Chapter 13 introduces risk as a capital budgeting factor. As we build on capital budgeting from chapter 12, why is it absolutely necessary to introduce and use risk in our project/investment analysis? Why not just use the weighted average cost of capital as we did in chapter 12? Last, how does the introduction of risk potentially change our decision about a project/investment?

Question