Basic scenario analysis Murdock Paints is in the process of evaluating two mutua

Question

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

Explanation / Answer

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

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