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 developed pessimistic, most likely, and optimistic estimates of the annual cash inflows associated with each project. These estimates are shown in the table on page 488.

PART THREE Long-Term Investment Decisions

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Project A                Project B

Initial investment (CF0)                                $8,000                         $8,000

Outcome                                                         Annual cash inflows (CF)

Pessimistic                                                                   $ 200                           $ 900

Most likely                                                                  1,000                           1,000

Optimistic                                                                   1,800                           1,100

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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 both projects have

20-year lives. 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 do you recommend? Why?

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