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 ​(CF 0CF0​)	​$12,700	​$12,700
Outcome	Annual cash inflows ​(CFCF ​)
Pessimistic	​$880	​$1,530
Most likely	1,680	1,680
Optimistic	2,470	1,710

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

b. Assume that the​ firm's cost of capital is 10.5% and that both projects have 20​-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?

Answer 1

(A) Range of cash inflow of each project

project A : $ 880 - $ 2470

project B : $ 1530 - $ 1710

(B) NPV of each project

Project A

if pessimistic

year	inflow	cumulative pv factor @ 10.5%	present value
0	(12700)	1.00	(12700)
1 - 20	$ 880	8.230	7242.40
		NPV	(5457.60)

if most likely

year	inflow	cumulative pv factor @ 10.5%	present value
0	(12700)	1.00	(12700)
1 - 20	$ 1680	8.230	13826.40
		NPV	1126.40

if optimistic

year	inflow	cumulative pv factor @ 10.5%	present value
0	(12700)	1.00	(12700)
1 - 20	$ 2470	8.230	20328.10
		NPV	7628.10

Project B

if pessimistic

year	inflow	cumulative pv factor @ 10.5%	present value
0	(12700)	1.00	(12700)
1 - 20	$ 1530	8.230	12591.90
		NPV	(108.10)

if most likely

year	inflow	cumulative pv factor @ 10.5%	present value
0	(12700)	1.00	(12700)
1 - 20	$ 1680	8.230	13826.40
		NPV	1126.40

if Optimistic

year	inflow	cumulative pv factor @ 10.5%	present value
0	(12700)	1.00	(12700)
1 - 20	$ 1710	8.230	14073.30
		NPV	1373.30

Range of NPV

Project A : $ (5457.60) to $ 7628.10

Project B : $ (108.10) to $ 1373.30

(C) yes above part (A) and (B) is in cosistent view because following same policies in each year.

(D) Recommendation : here project A,s NPV range is good than project B , it seems that project A is more risky than project B . if company wants to take risk than project A is better and if company does,t wants to take risk than project B is better