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 $24,500. 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 13 percent. Use Appendix D for an approximate answer but calculate your final answers using the formula and financial calculator methods. Cash Flow Probability $ 3,840 0.4 5,280 0.2 8. 110 0.3 10,370 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 c. Should Debby buy the new equipment? O Yes No

Answer 1

rate positively .. let me know if you need any clarification..

	Ans a)
	Computation of expected cash flow
	i	ii	iii=i*ii
	Cash flow	Probability	expected cash flow
	3840	0.4	1,536
	5280	0.2	1,056
	8110	0.3	2,433
	10370	0.1	1,037
	Expected cash flow		6,062
	therefore answer =		6,062
	Ans b)
	Computation of expected NPV
	year	Cash flow	PVIF @ 13%	present value
	0	-24500	1.0000	(24,500.00)
	1	6,062	0.8850	5,364.60
	2	6,062	0.7831	4,747.44
	3	6,062	0.6931	4,201.27
	4	6,062	0.6133	3,717.94
	5	6,062	0.5428	3,290.21
				(3,178.54)
	therefore NPV =			(3,178.54)
	Ans c)
	No , Debby should not buy the equipment as NPV is negative.