Eclipse
Sun Products (ESP) and Murdock Paints
8% 20% 7% 20%
13% 60% 17% 60%
18% 20% 27% 20%
(2) The standard deviation of the expected return.
(3) The coefficient of variation of the return.
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. These estimates are shown in the
following table. 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?
c. Do parts a and b provide consistent views of the two projects? Explain.
d. Which project do you recommend? Why?
Eclipse Sun Products (ESP) must
choose between two asset purchases. The
annual rate of return and related
probabilities given below summarize the firm's analysis.
Asset A Asset B
Rate of
Return Probability Rate of Return Probability8% 20% 7% 20%
13% 60% 17% 60%
18% 20% 27% 20%
a. For
each project compute:
(1) The
expected rate of return.(2) The standard deviation of the expected return.
(3) The coefficient of variation of the return.
b. Which
asset should ESP select?
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?
TUTORIAL PREVIEW
|
Asset A
|
|||||
|
Rate of return
|
Probability
|
Expected return (R x Pi)
|
Return - Exp. Return
|
(Return - Exp. Return)^2
|
Prob. X(Return - Exp. Return)^2
|
|
8%
|
20%
|
1.600%
|
-5.00%
|
0.2500%
|
0.0500%
|
|
13%
|
60%
|
7.800%
|
0.00%
|
0.0000%
|
0.0000%
|
File name: Eclipse Sun Products and Murdock
Paints.xls File type: . xlsx PRICE: 20
