Basic sensitivity analysis Murdock 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 in flows 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 (CF0)
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$8,000.00
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$8,000.00
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Outcome
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Annual cash inflows (CF)
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|
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Pessimistic
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$200.00
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$900.00
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Most likely
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1000
|
1000
|
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Optimistic
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1800
|
1100
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a. Determine the range of annual cash inflows for each of the two projects.
b. Assume that the firm' s cost of capital is 10% and that bothprojects have 20-yearlives. Construct a table similar to this 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 doyou recommend? Why?