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

b)

		Project A	Project B
	Initial cost	-12400	-12400
Pessimistic	Annual CF	840	1560
	NPV	-$4,984.55	$1,371.54
Most likely	Annual CF	1650	1650
	NPV	$2,166.05	$2,166.05
Optimistic	Annual CF	2450	1740
	NPV	$9,228.38	$2,960.57
	Range of NPV	$14,212.94	$1,589.02

c) Parts ​(a​) and ​(b​) provide consistent views of the two​ projects since the Range of cash flows is higher in Project A and range of NPV is also higher in Project A. This represents variability in cash flows which presents higher risk in this project.

d) I recommend Project B since the risk is lesser and the NPV is positive in all cases.

WORKINGS