Debby\'s Dance Studios... Debby\'s Dance Studios is considering the purchase of
ID: 2741562 • Letter: D
Question
Debby's Dance Studios...
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, 300. 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 10 percent. Use Appendix D for an approximate answer but calculate your final answers using the formula and financial calculator methods. 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.)Explanation / Answer
(a)
to find the expected cash flow we will each cash flow with it's respective probability
Cash Flow
probability
3980
0.4
1592
5280
0.2
1056
8140
0.2
1628
10600
0.2
2120
Total
6396
so the Expected cash flow is 6396
(b)
to find net present value we will first take each year cash flow's present value
year
cash flow
PV
1
6396
5814.545
2
6396
5285.95
3
6396
4805.409
4
6396
4368.554
5
6396
3971.413
now we will deduct each of the present values from the initial investment which is cost of equipment
= 24300 - 5814.55 - 5285.95 - 4805.41 - 4368.55 - 3971.413
= NPV(net present value) = 54.13
Cash Flow
probability
3980
0.4
1592
5280
0.2
1056
8140
0.2
1628
10600
0.2
2120
Total
6396
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.