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 $24,300. 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 10 percent. Use Appendix D for an approximate answer but calculate your final answers using the formula and financial calculator methods. Cash Flow $ 3,980 5,280 8,140 10,600 a. What is the expected value of the cash flow? The value you compute will apply to each of the five years. Probability 0.4 Expected cash flow Net present value 0.2 0.2 b. 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. Yes 0.2 c. Should Debby buy the new equipment?

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 $24,300. 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 10 percent. Use Appendix D for an approximate answer but calculate your final answers using the formula and financial calculator methods. Cash Flow $ 3,980 5,280 8,140 10,600 a. What is the expected value of the cash flow? The value you compute will apply to each of the five years. Probability 0.4 Expected cash flow Net present value 0.2 0.2 b. 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. Yes 0.2 c. Should Debby buy the new equipment?

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter11: Capital Budgeting Decisions

Section: Chapter Questions

Problem 10PB: Bouvier Restaurant is considering an investment in a grill that costs $140,000, and will produce...

See similar textbooks

Similar questions

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 $20,000. 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 12 percent. Use Appendix D for an approximate answer but calculate your final answers using the formula and financial calculator methods. Cash Flow $ 3,850 5,390 7,680 10,530 Probability 0.5 0.2 0.1 0.2 a. What is the expected value of the cash flow? The value you compute will apply to each of the five years. Expected cash flow b. 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. Net present value
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 $20,000. 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 12 percent. Use Appendix D for an approximate answer but calculate your final answers using the formula and financial calculator methods. Cash Flow Probability $ 3,850 0.5 5,390 0.2 7,680 0.1 10,530 0.2 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? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places.) c. Should Debby buy the new…
Your neighborhood laundromat is for sale and a friend is considering investing in this business. Your friend has asked for your financial advice regarding this endeavor. For the business alone and no other assets (such as the building and land), the purchase price is $250,000. The net cash flows for the project are $30,000 per year for the next 5 years. The plan is to borrow the money for this investment at 6%. You will need to submit a presentation sharing your recommendation and you must address the following questions:Part A: Calculate the Net Present Value and Payback Period: What is the net present value of this project? Calculate the simple payback period for this project. Your desired payback period is 5 years. How long is the payback period for this project? Use the following template to complete the Unit 4 Excel spreadsheet (IP): Unit 4 IP Assignment Template Part B: Evaluate the investment and provide calculations for an alternative deal: How would you evaluate this…
Your neighborhood laundromat is for sale and a friend is considering investing in this business. Your friend has asked for your financial advice regarding this endeavor. For the business alone and no other assets (such as the building and land), the purchase price is $250,000. The net cash flows for the project are $30,000 per year for the next 5 years. The plan is to borrow the money for this investment at 5%. What is the net present value of this project? Calculate the simple payback period Your desired payback period is 5 years. How long is the payback period. How would you evaluate this investment? What would be a good price at which to purchase this business?
Jan Booth is considering investing in either a storage facility or a car wash facility. Both projects have a five-year life and require an investment of $360,000. The cash flow patterns for each project are given below. Storage facility: Even cash flows of $120,000 per year Car wash: $112,500, $142,500, $60,000, $120,000, and $90,000 REQUIRED: 1. Calculate the payback period for the storage facility (even cash flows). 2. Calculate the payback period for the car wash facility (uneven cash flows). Which project should be accepted based on payback analysis? Explain. 3. What if a third mutually exclusive project, a laundry facility, became available with the same investment and annual cash flows of $150,000? Now which project would be chosen?
Seema is looking at an investment in upgrading an inspection line at her plant. The initial cost would be $300,000 with a salvage value of $50,000 after 5 years. Use the capital recovery formula to determine how much money must be saved every year to justify the investment at 8% interest rate.
Nemo Haulers is considering whether to purchase a new mini tractor for moving furniture within its warehouse. Nemo calculates that its current mini tractor generates $3100 of cash flow per year. A new mini tractor would cost $3000 and would provide cash flow of $4000 per year for five years. What is the equivalent annual cash flow for the new mini tractor (round to the nearest dollar), and should Nemo purchase the new tractor? Assume the cost of capital for Nemo is 10 per cent. $4000, purchase the new tractor $3000, do not purchase the new tractor $3209, purchase the new tractor $12 163, purchase the new tractor
A nursery would like to build another commercial greenhouse to expand its operations. It estimates that building another greenhouse will cost $180,000. To operate another greenhouse, the nursery estimates an additional labor and utilities will cost $30,000 per year. The greenhouse is expected to produce an additional $60,000 of revenue at the end of year 1; this revenue is expected to increase by $10,000 each year. Choose a cash flow diagram.
Management of Blossom Home Furnishings is considering acquiring a new machine that can create customized window treatments. The equipment will cost $225,550 and will generate cash flows of $97,750 over each of the next six years. If the cost of capital is 12 percent, what is the MIRR on this project?
Aqua Park can purchase a new dolphin (their old one died) for $5,000. The new dolphin will encourage greater park attendance and therefore increase the annual cash inflow by $2,000 for Years 1, 2, 3, and 4. If the cost of capital for the project is 10%, then what is the profitability index for the project?
Management of Crane Home Furnishings is considering acquiring a new machine that can create customized window treatments. The equipment will cost $209,550 and will generate cash flows of $83,750 over each of the next six years. If the cost of capital is 11 percent, what is the MIRR on this project?
Assume you are the finance manager of Almanor Company, and the company is considering investing in one of the three projects. The life for both the Projects X, M and Project Y is 5 years. Project X costs OMR. 20500, Project M costs OMR. 20500 and Project Y costs OMR.20500. The discount rate/cost of capital is 4.15%. Required: Use the following techniques to help company to decide which Machine is better and justify why? a) Payback period b) Discount payback period c) Net Present Value d) Present value index -Profitability index. Year Project X Project M Project Y 7865 3748 8752 4567 7609 8393 3. 9676 4628 4508 7292 8905 7836 9904 0066 8287 (Ctrl) - 45