Wades Gym is considering the purchase of new equipment that will enhance its pop

Question

Wades Gym is considering the purchase of new equipment that will enhance its popularity. The equipment will cost $30,000. He is not sure exactly how many new members this will attract, but she has an estimate of the following probability distribution of cash flows for the next 6 years. His cost of capital is 11%. SHOW WORK Cash Flow _ $4000, $6000, & $8000 Probability.... 0.3, 0.4, and 0.3 1. what is the expected value of the cash flow? the value you obtain will apply to each of the six years. 2. what is the expected net present value? 3. should he buy the equipment? why or why not?

Explanation / Answer

1) expected value of the cash flow = 4000*.3 +6000*.4 + 8000*.3 =$6000 2) expected net present value = -30000 + 6000/1.11 + 6000/1.11^2 + 6000/1.11^3 + 6000/1.11^4 + 6000/1.11^5 + 6000/1.11^6 =-$4616.77 expected net present value is negative. he should not buy the equipment

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