Debby Debby Debby\'s Dance Studios is considering the purchase of new sound equi

Question

Debby

Debby

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 $20,000. Debby is not sure how many members the new equipment will attract, but she estimates that her increased annual cash flows for each of the next five years will have the following probability distribution. Debby's cost of capital is 12 percent. (a) What is the expected value of the cash flow? (Omit the "$" sign in your response.) (b) What is the expected net present value? Use Appendix D. (Round "PV Factor" to 3 decimal places, intermediate and final answers to the nearest dollar amount. Negative amount should be indicated by a minus sign. Omit the "$" sign in your response.)

Explanation / Answer

A
The expected cashflow is:
3850*0.5 + 5390*0.2 + 7680*0.1 + 10530*0.2
= $5877

B
NPV = -20000*(1+i)-0 + 5877*[(1+i)-1 + .. + (1+i)-5] where i=12%
= $1185.270

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