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 $15,500. 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 14 percent. Use Appendix D for an approximate answer but
calculate your final answers using the formula and financial
calculator methods.
Cash Flow | Probability | ||||||
$ | 4,480 | 0.3 | |||||
5,850 | 0.3 | ||||||
8,340 | 0.2 | ||||||
9,900 | 0.2 | ||||||
a. What is the expected value of the cash flow?
The value you compute will apply to each of the five years.
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.)
c. Should Debby buy the new equipment?
No
Yes
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