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Assume Boulder Creek Industries in MAD 26-3 assigns the following probabilities to the estimated annual net cash flows: a. Compute the expected value of the annual net cash flows. b. Determine the expected net present value of the equipment, assuming a desired rate of return of 12% and expected annual net cash flows computed in part (a). Use the present value tables (Exhibits 2 and 5) provided in the chapter in determining your answer. c. Based on your results in parts (a) and (b), should Boulder Creek Industries invest in the equipment?

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Financial And Managerial Accounting

15th Edition
WARREN + 1 other
Publisher: Cengage Learning,
ISBN: 9781337902663

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Chapter
Section
BuyFindarrow_forward

Financial And Managerial Accounting

15th Edition
WARREN + 1 other
Publisher: Cengage Learning,
ISBN: 9781337902663
Chapter 26, Problem 4MAD
Textbook Problem
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Assume Boulder Creek Industries in MAD 26-3 assigns the following probabilities to the estimated annual net cash flows:

Chapter 26, Problem 4MAD, Assume Boulder Creek Industries in MAD 26-3 assigns the following probabilities to the estimated , example  1

  1. a. Compute the expected value of the annual net cash flows.
  2. b. Determine the expected net present value of the equipment, assuming a desired rate of return of 12% and expected annual net cash flows computed in part (a). Use the present value tables (Exhibits 2 and 5) provided in the chapter in determining your answer.
  3. c. Chapter 26, Problem 4MAD, Assume Boulder Creek Industries in MAD 26-3 assigns the following probabilities to the estimated , example  2 Based on your results in parts (a) and (b), should Boulder Creek Industries invest in the equipment?

a.

To determine

Compute the expected value of the annual net cash flows.

Explanation of Solution

Compute the expected value of the annual net cash flows:

Annual net cash flowProbability of occurringExpected Value
$800,000 0.60$480,000
$600,000 0...

b.

To determine

Compute the net present value of the equipment, assuming 12% desired rate of return for the given annual net cash flows in part (a).

c.

To determine

Recommend whether Company BC should invest in the equipment based upon parts (a) and (b).

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