The Dental Clinic, Inc. is contemplating replacing an obsolete word processing system with one of two innovative lines of equipment. Alternative 1 requires a current investment layout of $26,022, whereas alternative 2 requires an outlay of $31,048. The following cash flows (cost savings) will be generated each year over the five-year useful lives of the new systems.

	Probability	Cash Flow
Alternative 1	0.32	$7,000
	0.36	10,000
	0.32	13,000
Alternative 2	0.18	$7,500
	0.64	10,000
	0.18	12,500

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 15% for the cash flow with a higher degree of dispersion and a 12% rate for the less risky cash flows, calculate the expected net present value for each investment. Which alternative should be chosen?

 

Answer rating: 100% (QA)

Step 13 Expected return pix ci where pi is probability and ci is cash flow Expected return of Alt... View the full answer