Prime 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. Project AProject BInitial investment(CF0)$12,900$12,900OutcomeAnnual cash inflows(CF )Pessimistic$830$1,540Most likely1,6901,690Optimistic2,4901790 Assume that the firm's cost of capital is 9.1% and that both projects have 18-yearlives. Complete the NPV table below for project A: (Round to the nearest cent.) NPVsOutcomeProject APessimistic$ Most likely Optimistic Range$ c. Do parts (a)and (b) provide consistent views of the two projects? Explain.d. Which project do you recommend? Why?

Calculation of range of cash outflows: Range of annual cash outflows= Optimistic cash flow -…

Answered: Prime Paints is in the process of…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter11: Capital Budgeting And Risk

Section: Chapter Questions

Problem 16P

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Prime 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.

	Project A	Project B
Initial investment (CF0)	$12,900	$12,900
Outcome	Annual cash inflows (CF )
Pessimistic	$830	$1,540
Most likely	1,690	1,690
Optimistic	2,490	1790

Assume that the firm's cost of capital is 9.1% and that both projects have 18-year
lives. Complete the NPV table below for project A: (Round to the nearest cent.)

NPVs
Outcome	Project A
Pessimistic	$
Most likely
Optimistic
Range	$

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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