My question has four part answer:
Murdock Paints is in the process of evaluating two mutually exclusive additions to its processing capacity. The firms financial analysts have developed pessimistic, most likely, and optimistic estimates of the annual cash inflows associated with each project. These estimates are shown is the following table.
Project A Project B
Initial investment (CFo) $8,000 $8,000
Outcome Annual cash inflows (CF)
Pessimistic $ 200 $ 900
Most likely 1,000 1,000
Optimistic 1,800 1,100
a) Determine the range of annual cash inflows for each of the two projects.
b) Assume that the firms cost of capital is 10% and that both projects have 20-year lives. Construct a table similar to this for the NPVs for each project. Include the range of the NPVs for each project.
c) Do parts a and b provide consistent views of the two projects?
d) which project do you recommend? Why?
