Debbys Dance Studios is considering the purchase of new sound equipment that will enhance the...
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Debbys Dance Studios is considering the purchase of new sound equipment that will enhance the popularity of its aerobics dancing. The equipment will cost $33,600. 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. Debbys cost of capital is 11 percent. Use Appendix D for an approximate answer but calculate your final answers using the formula and financial calculator methods.
Cash Flow Probability
$ 4,050 .3
5,080 .3
8,390 .2
9,810 .2
a. What is the expected value of the cash flow? The value you compute will apply to each of the five years.
Expected cash flow: ____________
b. What is the expected net present value?
Net present value: ____________
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