P12-14 Basic scenario analysis Aluminum Projects is in the process of evaluating two new aluminum cutting machines with the intention of purchasing one of them. The firm's financial analysts have developed pessimistic, most likely, and optimistic estimates of the annual cash inflows for the two machines, which are shown in the following table. Initial investment (CF0) Outcome Pessimistic Most likely Optimistic Machine A $5,000 Machine B $5,500 Annual cash inflows (CF) $ 550 $ 850 $ 950 $1,050 $1,350 $1,200 a. Determine the range of annual cash inflows for each machine. b. Assume that firm's cost of capital is 10% and that both machines have 12-year lives. Construct a table similar to this one for the NPVs for each machine. Include the range of NPVs for each machine. c. Based on the range of the cash flows and the NPVs of each machine, which machine should be acquired? d. Which machine should the firm invest in if it is not willing to take risks? Why?

P12-14 Basic scenario analysis Aluminum Projects is in the process of evaluating two new aluminum cutting machines with the intention of purchasing one of them. The firm's financial analysts have developed pessimistic, most likely, and optimistic estimates of the annual cash inflows for the two machines, which are shown in the following table. Initial investment (CF0) Outcome Pessimistic Most likely Optimistic Machine A $5,000 Machine B $5,500 Annual cash inflows (CF) $ 550 $ 850 $ 950 $1,050 $1,350 $1,200 a. Determine the range of annual cash inflows for each machine. b. Assume that firm's cost of capital is 10% and that both machines have 12-year lives. Construct a table similar to this one for the NPVs for each machine. Include the range of NPVs for each machine. c. Based on the range of the cash flows and the NPVs of each machine, which machine should be acquired? d. Which machine should the firm invest in if it is not willing to take risks? Why?

Practical Management Science

6th Edition

ISBN:9781337406659

Author:WINSTON, Wayne L.

Publisher:WINSTON, Wayne L.

Chapter9: Decision Making Under Uncertainty

Section: Chapter Questions

Problem 30P

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