Question

Debby's Dance Studios is considering the purchase of new sound equipment that will enhance the popularity of its aerobics dancing. The equipment will cost $31,400. Debby is not sure how many members the new equipment will attract, but she estimates that her increased annual cash flows for each of the next five years will have the following probability distribution. Debby's cost of capital is 15 percent. Use Appendix D for an approximate answer but calculate your final answers using the formula and financial calculator methods. Cash Flow $ 3,820 5,880 8,160 10, 250 Probability 0.4 0.2 0.3 0.1 a. What is the expected value of the cash flow? The value you compute will apply to each of the five years. Expected cash flow b. What is the expected net present value? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places.) Net present value

Answer 1

D17 fc =SUM(D11:016) A B с D E a 1 2 Cash flows 3 $ 3,820.00 4 $ 5,880.00 5 $ 8,160.00 6 $ 10,250.00 7 Probability Expected Cash Flow 0.4 $ 1,528.00 0.2 $ 1,176.00 0.3 $ 2,448.00 0.1 $ 1,025.00 $ 6,177.00 00 9b 10 year 11 12 13 Cash flows pv@15% 0 $(31,400.00) 1 $ 6,177.00 2 $ 6,177.00 3 $ 6,177.00 4 $ 6,177.00 5 $ 6,177.00 ENPV Present value 1.0000 $ -31,400.00 0.8696 $ 5,371.30 0.7561 $ 4,670.70 0.6575 $ 4,061.48 0.5718 $ 3,531.72 0.4972 $ 3,071.06 $ -10,693.74 14 15 16 17 18 19

D17 for =SUM(D11:016) A B с D 1 a 2 Cash flows 3 3820 Probability 0.4 0.2 4 5880 5 8160 Expected Cash Flow =A3*B3 =A4%B4 |=A5*B5 =A6*B6 |=SUM(C3:06) 0.3 0.1 6 10250 7 8 9b Cash flows 10 year 11 0 -31400 12 1 6177 Present value =B11 C11 =B12*C12 =B13*C13 =B14*C14 13 2 pv@15% 1 =C11/1.15 =C12/1.15 =C13/1.15 =C14/1.15 =C15/1.15 6177 14 3 6177 15 4 6177 =B15*C15 16 5 6177 I=B16 C16 =SUM(D11:016) 17 ENPV 18