Question: Fishman 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:
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Project A
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Project B
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Initial Investment (CFo)
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$8,000
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$8,000
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Outcome
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Annual Cash Inflows (CF)
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|
Pessimistic
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$ 200
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$ 900
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Most Likely
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1,000
|
1,000
|
|
Optimistic
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1,800
|
1,100
|
Q1. Determine the rage of annual cash inflows for each of the two projects.
Q2. Assume that the firm’s cost of capital is 10% and that both projects have 20 year lives. Construct a table similar to this for the NPV’s for each project. Include the range of NPV’s for each project.
Q3. Do parts (1) and (2) provide consistent views of the two projects? Explain.
Q4. Which project do you recommend? Why?