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

Question

Determine the range of annual cash inflows for each of the two projects. Assume that the firm's cost of capital is 9.8% 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. Do parts (a) and (b) provide consistent views of the two projects? Explain. Which protect do you recommend? Why? The range of annual cash inflows for project A is $. (Round to the nearest dollar.) The range of annual cash inflows for project B is $. (Round to the nearest dollar.) Assume that the firm's cost of capital is 9.8% and that both projects have 19-year lives. Complete the NPV table below for protect A: (Round to the nearest

Explanation / Answer

a) Range of Annual Cash Inflows of Project A = $200 to $1830 and of Project B = $900 to $1080

b) possible present value of cash inflows of the project and NPV =

NPV range = project A = (-6005) to (7813) and project B = (-71) to (1455)

c)

Yes, point a and b, both shows the consistent views of the two projects as both range from negative to the positive NPV as per the range of cash flow per annum.

d)

Project B would be recommended as it plays safe because pessimistic outcome doesn't brings high negetive cashflow though not coming up with high positive cashflow in optimistic outcome. But if the company is risk averse, then they can go for Project A, where pessimistic outcome brings high negetive cashflow and in optimistic outcome, coming up with high positive cashflow.

Outcome CF-Project A $ Discount rate (PVIFA(9.8%,19) Present value of Cash Flow (A) $ NPV(A)=Present value - $7700 CF-Project B $ Present value of Cash Flow (B) $ NPV(B)=Present value - $7700 Pessimistic 200 8.4769 1695 -6005 900 7629 -71 Most Likely 1000 8.4769 8477 777 1000 8477 777 Optimistic 1830 8.4769 15513 7813 1080 9155 1455

Related Questions

Navigate

• Browse (All)
• Browse D
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.