Debby’s Dance Studios is considering the purchase of new sound equipment that wi

Question

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.

  

  

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. )

Cash Flow Probability $ 3,980 .4 5,280 .2 8,140 .2 10,600 .2

Explanation / Answer

a

3

b.

net present value

6396$x 3.696(pvifa @ 10%, n=5)=

22767 present value

24300 present vlause of outflowNet present value=inflow-outflow

=22767-24300=$-1533net present vlaue

c) NPV is negative so debby should not buy this new equipment .

year cash flow in $ probabulity cash flow*probabulity 1 3980 0.4 1592 2 5280 0.2 1056

3

8140 0.2 1628 4 10600 0.2 2120 total $6396

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