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Capital budgeting proposals

A corporation is assessing the risk of two capital budgeting proposals. The financial analysts have developed pessimistic, most likely, and optimistic estimates of the annual cash inflows which are given in the following table. The firm's cost of capital is 10 percent.

Project A
Initial Investment Annual Cash Inflow Outcome
\$20,000 \$5,000 Pessimistic
\$10,000 Most likely
\$15,000 Optimistic

Project B
Initial Investment Annual Cash Inflow Outcome
\$100,000 \$20,000 Pessimistic
\$40,000 Most likely
\$100,000 Optimistic
The range of the annual cash inflows for Project A is ________________.
a) \$30,000
b) \$10,000
c) \$5,000
d) \$0

If the projects have five-year lives, the range of the net present value for Project B is
approximately ________________.
a) \$80,560 c) \$255,410
b) 201,000 d) \$303,280

Solution Preview

The range of the annual cash inflows for Project A is ________________.
a) \$30,000
** b) \$10,000**
c) \$5,000
d) \$0

The range is the value over which the cash flows vary. The range is 15,000-5,000=\$10,000 for Project A

If the ...

Solution Summary

The solution explains how to determine the range for annual cash flows and the range for net present value

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