Basic scenario analysis Murdock Paints is in the process of

Basic scenario analysis Murdock Paints is in the process of evaluating two mutually exclusive additions to its processing capacity. The firm\'s financial analysts have de- veloped pessimistic, most likely, and optimistic estimates of the annual cash inflows associated with each project. These estimates are shown in the following table. P12-4 Project A -$8,000 Project B -$8,000 Initial investment (CFo) Outcome Pessimistic Most likely Optimistic Annual cash inflows (CF) S 900 1,000 1,100 $ 200 1,000 1,800 a. Determine the range of annual cash inflows for each of the two projects

Solution

a) Range = Highest value - lowest value

b) Assuming Cost of capital = 10% and life = 20 years

NPV = Present value of cash Inflows - Present value of cash outflow

= Cash Inflow * PVIFA - PV of cash outflow

(200*8.514) - 8000

= -6297.2

(900*8.514 )-8000

= -337.40

(1000*8.514) -8000

=514

(1,000*8.514 ) -8,000

=514

(1800*8.514) -8000

=7325.2

( 1,100*8.514) - 8,000

= 1365.4

= 7325.2 - (-6297.2)

= 13622.4

=1365.40 - (-337.40)

= 1702.8

	Project A	Project B
Optimistic	1800	1100
Pessimistic	200	900
Range	1600	200