Question

please answer all parts!

Initial investment (CF) Outcome Pessimistic Most likely Optimistic Project A Project B $12,100 $12,100 Annual cash inflows (CF) T $800 $1,590 1,700 1,700 2.480 1,740 a. Determine the range of annual cash inflows for each of the two projects. b. Assume that the firm's cost of capital is 9.5% and that both projects have 15-year lives. Construct a table showing the NPVs for each project for each of the possible outcomes. 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? a. The range of annual cash inflows for project Als $ (Round to the nearest dollar.)

Answer 1

Answer for A- The range of cash inflows for Project A is $ 800 - $ 2480 and Project B is $ 1590 - $ 1740. Answer for B:- For Project A Present Value Pessimistic- Most Likely [email protected]% $ 800 $ 1700 Optimistic $ 2480 Present Value [email protected]% For Project B Pessimistic- $ 1590 Most Likely $ Optimistic $ 1700 1740 Year Year (1/(1+R)^N} {1/(1+R)^N} 0.9132 0.8340 0.7617 0.6956 0.6352 0.5801 0.5298 0.4838 0.4418 0.4035 0.3685 0.3365 0.3073 0.2807 0.2563 Cash Cash inflow*PVF inflow*PVF -$12,100.00 -$12,100.00 $730.59 $1,552.51 $667.21 $1,417.82 $609.32 $1,294.81 $556.46 $1,182.48 $508.18 $1,079.89 $464.09 $986.20 $423.83 $900.64 $387.06 $822.50 $353.48 $751.14 $322.81 $685.97 $294.80 $626.46 $269.23 $572.11 $245.87 $522.47 $224.54 $477.15 $205.06 $435.75 Cash inflow*PVF $12,100.00 $2,264.84 $2,068.35 $1,888.90 $1,725.02 $1,575.36 $1,438.69 $1,313.87 $1,199.88 $1,095.78 $1,000.72 $913.90 $834.61 $762.20 $696.07 $635.68 0.9132 0.8340 0.7617 0.6956 0.6352 0.5801 0.5298 0.4838 0.4418 0.4035 0.3685 0.3365 0.3073 0.2807 0.2563 Cash inflow*PVF -$12,100.00 $1,452.05 $1,326.08 $1,211.03 $1,105.96 $1,010.01 $922.39 $842.36 $769.28 $702.54 $641.59 $585.92 $535.09 $488.67 $446.27 $407.55 Cash inflow*PVF -$12,100.00 $1,552.51 $1,417.82 $1,294.81 $1,182.48 $1,079.89 $986.20 $900.64 $822.50 $751.14 $685.97 $626.46 $572.11 $522.47 $477.15 $435.75 Cash inflow*PVF $12,100.00 $1,589.04 $1,451.18 $1,325.28 $1,210.30 $1,105.30 $1,009.40 $921.83 $841.85 $768.82 $702.11 $641.20 $585.57 $534.77 $488.37 $446.00 NPV = Present value of cash inflow - present value of cash outflow NPV = Present value of cash inflow - present value of cash outflow $5,837.46 $1,207.90 $7,313.87 $346.80 $1,207.90 $1,521.02

Answer for C:- Project A and B is giving same result in Pessimistic case in both cases I.e. when we are calculating Discounted and non-discounting techniques, however due to discounting Project A is proving much loss but Project B is providing profit in that case also. The projects are appearing consistent because annual cash inflows are same. Answer for D :- The project A provides us NPV of $5837 in pessimistic case while NPV of $ 7313 in optimistic case. Similarly, The project B provides us NPV of $346 in pessimistic case while NPV of $ 1521 in optimistic case. The Project to be choosen will depend on the risk taking capacity of decsion maker becasue Project A is appearing volatile and also providing a negative NPV in pessimistic case while Project B is not providing negative NPV. Similarly in optimistic case results are far different. So Project will be choosen according to risk taking capacity.