# Capital Budgeting and Net Present Value

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 the project. These estimates are shown in the following table.

Project A Project B

Initial Investment (Cfo) $8,000 $8,000

Outcome Annual Cash Flows (CF)

Pessimistic $200 $900

Most Likely $1,000 $1,000

Optimistic $1,800 $1,100

1. Determine the range of annual cash inflows for each of the two projects.

2. 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 Net Presents Value(s) for each present value. Include the range of NPVs for each project.

3. Do parts 1 and 2 provide consistent views of the two projects? Explain.

4. Which project do you recommend? Why?

See attached file.

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#### Solution Preview

The answer is in the attached file.

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 the project. These estimates are shown in the following table.

Project A Project B

Initial Investment (Cfo) $8,000 $8,000

Outcome Annual Cash Flows (CF)

Pessimistic $200 $900

Most Likely $1,000 $1,000

Optimistic $1,800 $1,100

1. Determine the range of annual cash inflows for each of the two projects.

Range of annual cash flows is equal to the maximum (optimistic) - minimum (pessimistic) values

Project A $1,600 =$1,800. - $200.

Project ...

#### Solution Summary

Compares 2 projects using NPV.