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)	$12,900	$12,900
Outcome	Annual cash inflows (CF)
Pessimistic	$860	1500
Most likely	1690	1690
Optimistic	2480	1740

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

b. Assume that the​ firm's cost of capital is 9.6 % 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.

Answer 1