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Breakeven Cash inflows and risk. Pueblo Enterprises is considering investing in either of tow mutually exclusive projects, X and Y. Project X requires an initial investment of $30,000; project Y requires $40,000. Each project's cash inflows are 5-year annuities. Project X's inflows are $10,000 per year; project Y's are $15,0000. The firm has unlimited funds and, in the absence of risk differences, accepts the project with the highest NPV. The cost of capital is 15%.
Profitability of achieving Cash inflow in given range
Range of cash inflow Project X Project Y
$0 to $5,000 0%` 5%
$5,000 to $7500 10 10
$7,500 to $10,000 60 15
$10,000 to $12,000 25 25
$12,500 to $15,000 5 20
$15,500 to $20,000 0 15
Above $20,000 0 10
b. Find the breakeven cash inflow for each project.
c. The firm has estimated the probabilities of achieging various ranges of cahse inflows for the two projects, as shown in the table above. What is the probability that each project will achieve the breakeven cahs inflow found in part b.
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