Debbys Dance Studios is considering the purchase of new sound equipment that will enhance the popularity of

Question:

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 $27,900. 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 15 percent.

Cash Flow Probability

$4,570.........1

5,550.........3

7,400.........4

9,930.........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?

c. Should Debby buy the new equipment?

Net Present Value
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at... Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...