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Process of evaluating two mutually exclusive additions

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Reference no: EM132401861

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. The following table shows these estimates.

Project A Project B

Initial investment (CF0) 2$12,200 2$12,200

Outcome Annual cash inflows (CF)

Pessimistic $ 850 $1,550

Most likely 1,650 1,650

Optimistic 2,450 1,750

Soft drinks Snack foods

Initial investment (CF0) 2$5,200 2$5,200

Outcome Annual cash inflows (CF)

Pessimistic $ 500 $ 400

Most likely 750 750

Optimistic 1,000 1,200

a. Determine the range of annual cash inflows for each project.

b. Assume that the firm's cost of capital is 9.3% and that both projects have 15-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?

Reference no: EM132401861

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