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 analyst veloped pessimistic, most likely, and optimistic estimates of the annual cash inflows associated with each project. These estimates are shown in the following table. 2-4 Project A -$8,000 Project B -$8,000 Initial investment (CFo) Outcome Pessimistic Most likely Optimistic Annual cash inflows (CF) 200 1,000 1,800 S 900 1,000 1,100 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% and that both projects have 20-year lives. Construct a table similar to this one for the NPVs for each project. 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?

Solution

b

d

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Ans:

No

Range = Highest value - Lowest value
	Cash inflows
Outcome	Project A	Project B
Pessimistic	200	900
Most likely	1,000	1,000
Optimistic	1,800	1,100
Range =	1,600	200