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Investment expected cash flows

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 $20,900. 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.

 

ProbabilityCash flow



0.1$4,570  



0.3 5,550  



0.4 7,400  



0.2 9,930  



 

a. What is the expected cash flow?
 

Expected cash flow           $ 

  

b. What is the expected NPV? (Round "PV Factor" to 3 decimal places. Do not round intermediate calculations. Round the final answer to the nearest whole dollar.)

 

NPV           $ 

 

c. Should Debby buy the new equipment?

 

multiple choice

  • Yes

  • No



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