Problem 13-16 (Algo) Expected value with net present value [LO13-1]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 $25,400. Debby is not sure how many members the new equipment will attract, but she estimates that herincreased annual cash flows for each of the next five years will have the following probability distribution. Debby's cost of capital is 13percent. Use Appendix D for an approximate answer but calculate your final answers using the formula and financial calculatormethods.Cash Flow$ 4,5205,4407,80010,010Probability0.20.4a. What is the expected value of the cash flow? The value you compute will apply to each of the five years.Expected cash flow0.30.1b. What is the expected net present value?Note: Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to2 decimal places.Net present valuec. Should Debby buy the new equipment?O YesO No

One of the methods used for capital budgeting is the net present value method. In order to compute…

Answered: Debby's Dance Studios is considering…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Jerry owns a restaurant and has the opportunity to buy a high-quality espresso coffee machine for $5,000. After carefully studying projected costs and revenues, Jerry estimates that the machine will produce a net cash flow of $1,600 annually and will last for five years. He determines that an interest rate of 10% is an adequate return on investment for his business. Calculate the present value of the machine to Jerry. Based on your calculation, do you think a decision to purchase the machine would be wise?
To motivate her staff, Debra runs a few different PV scenarios to show how their additional effort could really pay off. Under average conditions, after-tax annual net operating cash flows are $84,000. Under a bit more optimistic (but still possible) conditions, after-tax annual net operating cash flows could be $130,000. She tells her staff that if these higher cash flow amounts could be earned for 4 consecutive years, a portion of that value could be used for employee perks (i.e., celebratory trips paid for by the company). She thinks she has their attention. Using two different possible discount rates (6% and 10%), calculate the range of NPVs for the average and optimistic options. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and final answers to 2 decimal places e.g. 5,125.36. Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).) Click here to view the factor table Average Cash Flows Optimistic…
Calculate the NPV based upon the following facts: Bob has just completed the development of a better face shield for health workers. The new product is expected to produce annual revenues of $230,000. Bob requires an investment in an advanced 3D Printer costing $30,000. The project has an expected life of 5 years. The 3D printer will have a $20,000 salvage value at the end of 5 years. Working capital is expected to increase by $80,000 which Bob will recover at the end of the products life cycle. Annual operating expenses are estimated at $200,000. The required rate of return is 4%.
Misty needs to have $20,000 at the end of 6 years to fulfill her goal of purchasing a small sailboat. She is willing to invest a lump sum today and leave the money untouched for 6 years until it grows to $20,000, but she wonders what sort of investment return she will need to earn to reach her goal. Use your calculator or spreadsheet to figure out the annually compounded rate of return needed if she can invest $13,900 today.
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 $15,500. 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 13 percent. Use Appendix D for an approximate answer but calculate your final answers using the formula and financial calculator methods. Cash Flow $ 4,390 5,110 8,240 10,000 Probability 0.3 0.2 0.3 0.2 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? Note: Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places. Net present value
Wilma is considering opening a widget factory. The unlevered cost of equity for making widgets is 0.1. This factory would cost $10 million to set up, and would produce EBIT of $3 million per year for the foreseeable future. She is thinking of applying for a $3 million subsidized perpetual loan to finance this project. Complying with the auditing requirements of this loan would have a present value of $2 million. This loan would have a rate of 0.04, while the rate she could get from the bank is 0.07. Her tax rate is 0.41. What is the NPV of this project, using the APV method?
Roxanne plans on going on vacation to Europe in four years. The trip will cost $4,000. She proposes to finance the trip by investing a sum of money now at 8% compounded annually. How much should Roxanne invest now in order to obtain her goal of $4,000? Answer the following questions: Fill in the factor that you used to solve the problem : How much should Roxanne invest now in order to obtain her goal (round up to the nearest dollar)?
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