Scenario analysis Automated Food Distribution Corp. (AFDC) produces vending machines and places them in public buildings. The company has obtained permission to place one of its machines in a local library. The company makes two types of machines. One distributes soft drinks, and the other distributes snack foods. AFDC expects both machines to provide benefits over a 10-year period, and each has a required investment of $3,000. The firm uses a 10% cost of capital. Management has constructed the following table of estimates of annual cash inflows for pessimistic, most likely, and optimistic results.
Soft drinks - Snacks goods
Initial investment -$3,000 -$3,000
Outcome - Annual cash inflows (CF)
Pessimistic $500 $400
Most likely 750 750
Optimistic 1,000 1,200
A. Determine the range of annual cash inflows for each of the two vending machines.
B. Construct a table similar to this one for the NPVs associated with each outcome for both machines.
C. Find the range of NPVs, and subjectively compare the risks associated with these machines.