Risk Analysis - Show all calculations A new snow making machine utilizes technol

Question

Risk Analysis - Show all calculations A new snow making machine utilizes technology that permits snow to be produced in ambient temperature of 70 degrees Fahrenheit or below. The estimated cash flows for the ski resort contemplating this investment are uncertain as shown below (note: pr. = probability). Capital investment $120,000 (certain, pr. = 1.0) Annual revenues $140,000 with pr. 0.6, or $135,000 with pr. 0.4 Annual expenses $60,000 with pr. 0.6, or $50,000 with pr. 0.4 Salvage value $40,000 with pr. 0.5, or $35,000 with pr. 0.5 The machine is expected to have a useful life of 12 years, and the MARR of the ski resort is 8% per year. What is the expected present worth of this investment?

Explanation / Answer

Expected revenue ($) = 140,000 x 0.6 + 135,000 x 0.4 = 84,000 + 54,000 = 138,000

Expected cost ($) = 60,000 x 0.6 + 50,000 x 0.4 = 36,000 + 20,000 = 56,000

Expected net benefit = Expected revenue - Expected cost = $(138,000 - 56,000) = $82,000

Expected salvage ($) = 0.5 x (40,000 + 35,000) = 0.5 x 75,000 = 37,500

Expected PW ($) = - 120,000 + 82,000 x PVIFA(8%, 12) + 37,500 x PVIF(8%, 12)

= - 120,000 + 82,000 x 7.5361 + 37,500 x 0.3971 = - 120,000 + 617,960 + 14,892 = 512,852

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