Table 11.6
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.
-The range of the annual cash inflows for Project A is ________.(See Table 11.6)

Question

Table 11.6
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. 
-The range of the annual cash inflows for Project A is ________.(See Table 11.6)

Quizplus · Accepted Answer

To calculate the range of the annual cash inflows for Project A, we subtract the pessimistic estimate from the optimistic estimate: $50,000 - $40,000 = $10,000.

For Project B, the range is $30,000 - $20,000 = $10,000.

Since Project B has a higher expected cash inflow and a lower range, it is the better choice. Therefore, the best choice is Project B.

Table 11.6 A Corporation Is Assessing the Risk of Two Capital Budgeting