Problem 13-16 (Algo) Expected value with net present value [LO13-1] Debbys Dance Studios is considering the purchase of new sound equipment that will enhance the popularity of its aerobics dancing. The equipment will cost $24,400. 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. Debbys cost of capital is 14 percent. Use Appendix D for an approximate answer but calculate your final answers using the formula and financial calculator methods. Cash Flow Probability $ 4,360 0.3 5,770 0.3 8,230 0.1 10,710 0.3 What is the expected value of the cash flow? The value you compute will apply to each of the five years. 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. Should Debby buy the new equipment? multiple choice Yes No Correct

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 $24,400. 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 14 percent. Use Appendix D for an approximate answer but calculate your final answers using the formula and financial calculator methods. 0. 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? Note: Negatlve amount should be Indleated by a minus sign. Do not round Intermedlate calculatlons and round your answer to 2 decimol places. Answer is complete but not entirely correct. c. Should Debby buy the new equipment? Yes No Present value of an annuity of $1,PVIFA PVA=A[1(1/(1+i)n)]/i