Table 11.7
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 11.7)

Question

Table 11.7
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 11.7)

Quizplus · Accepted Answer

The range of annual cash inflows for Project A is the difference between the optimistic and pessimistic estimates, which is $60,000 - $50,000 = $10,000. Project B has a range of annual cash inflows of $0 because the most likely estimate is the same as the pessimistic estimate. Therefore, Project A is the better choice as it has a higher potential upside in cash inflows compared to Project B.

Table 11.7 A Corporation Is Assessing the Risk of Two Capital Budgeting