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 $20,000. 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 12 percent. Use Appendix D for an approximate answer but calculate your final answers using the formula and financial calculator methods. Cash Flow Probability $ 3,850 0.5 5,390 0.2 7,680 0.1 10,530 0.2 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.) c. Should Debby buy the new equipment? multiple choice No Yes

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 $20,000. 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 12 percent. Use Appendix D for an approximate answer but calculate your final answers using the formula and financial calculator methods. Cash Flow Probability $ 3,850 0.5 5,390 0.2 7,680 0.1 10,530 0.2 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.) c. Should Debby buy the new equipment? multiple choice No Yes

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section: Chapter Questions

Problem 4P

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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 $20,000. 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 12 percent. Use Appendix D for an approximate answer but calculate your final answers using the formula and financial calculator methods. Cash Flow $ 3,850 5,390 7,680 10,530 Probability 0.5 0.2 0.1 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
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You are considering starting a new doughnut shop in the Prince Kuhio Mall. You wish to complete a cash flow statement to be used for capital budgeting purposes. You will have to purchase $80,000 of equipment with cash you have saved to manufacture the doughnuts. You will purchase the equipment on the day you start the business. You will depreciate the equipment using 3-year straight-line depreciation to a salvage value of $20,000. You will need to have $20,000 of inventory and you will need to have $5,000 in cash for the cash registers. You will need to have the inventory and cash in place the day you start the business and it will remain in place throughout the life of the business. You will owe your suppliers $5,000 at all times, beginning the day that you start the business and continuing through the life of the business. Based on your sales estimate, you believe that you will be able to sell $1,000,000 of doughnuts per year. You have estimated labor costs to be $200,000 for the…
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