Eclipse Sun Products (ESP) and Murdock Paints

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 Probability
8% 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?

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?

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?