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Scenario Analysis for Mutually Exclusive Projects

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.

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

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?

Solution Summary

This solution illustrates how to perform scenario analysis (regarding net present value) for two mutually exclusive projects. Attached as Excel.