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. Cash Flow $ 3,980 5,280 8,140 10,600 a. What is the expected value of the cash flow? The value you compute will apply to each of the five years. Probability 0.4 Expected cash flow Net present value 0.2 0.2 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. Yes 0.2 c. Should Debby buy the new equipment?
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. Cash Flow $ 3,980 5,280 8,140 10,600 a. What is the expected value of the cash flow? The value you compute will apply to each of the five years. Probability 0.4 Expected cash flow Net present value 0.2 0.2 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. Yes 0.2 c. Should Debby buy the new equipment?
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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Give typing answer with explanation and conclusion
Transcribed Image Text: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.
Probability
0.4
0.2
0.2
0.2
Cash Flow
$ 3,980
5,280
8,140
10,600
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
c. Should Debby buy the new equipment?
Yes
No
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