One-Hour Dry clean, Inc., is replacing an obsolete dry cleaning machine with one of two innovative pieces of equipment. Alternative 1 requires a current investment outlay of $25,373, whereas alternative 2 requires an outlay of $24,199. The following cash flows (cost savings) will be generated each year over the new machines’ four-year lives:

A. Calculate the expected cash flow for each investment alternative.
B. Calculate the standard deviation of cash flows (risk) for each investment alternative.
C. The firm will use a discount rate of 12 percent for the cash flows with a higher degree of dispersion and a 10 percent rate for the less risky cash flows. Calculate the expected net present value for each investment. Which alternative should bechosen?

  • CreatedFebruary 13, 2015
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