Foundations of Financial Management
16th Edition
ISBN: 9781259277160
Author: Stanley B. Block, Geoffrey A. Hirt, Bartley Danielsen
Publisher: McGraw-Hill Education
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Textbook Question
Chapter 13, Problem 16P
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
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
c. Should Debby buy the new equipment?
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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 $15,500. 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 13
percent. Use Appendix D for an approximate answer but calculate your final answers using the formula and financial calculator
methods.
Cash Flow
$ 4,390
5,110
8,240
10,000
Probability
0.3
0.2
0.3
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…
Chapter 13 Solutions
Foundations of Financial Management
Ch. 13 - Prob. 1DQCh. 13 - Discuss the concept of risk and how it might be...Ch. 13 - When is the coefficient of variation a better...Ch. 13 - Explain how the concept of risk can be...Ch. 13 - If risk is to be analyzed in a qualitative way,...Ch. 13 - Assume a company, correlated with the economy, is...Ch. 13 - Assume a firm has several hundred possible...Ch. 13 - Explain the effect of the risk-return trade-off on...Ch. 13 - What is the purpose of using simulation analysis?...Ch. 13 - Assume you are risk-averse and have the following...
Ch. 13 - Myers Business Systems is evaluating the...Ch. 13 - Prob. 3PCh. 13 - Prob. 4PCh. 13 - Prob. 5PCh. 13 - Possible outcomes for three investment...Ch. 13 - Prob. 7PCh. 13 - Prob. 8PCh. 13 - Prob. 9PCh. 13 - Prob. 10PCh. 13 - Prob. 12PCh. 13 - Waste Industries is evaluating a 70,000 project...Ch. 13 - Prob. 14PCh. 13 - Debby’s Dance Studios is considering the...Ch. 13 - Prob. 17PCh. 13 - Prob. 18PCh. 13 - Allison’s Dresswear Manufacturers is preparing a...Ch. 13 - Prob. 20PCh. 13 - Prob. 21PCh. 13 - Prob. 22PCh. 13 - Ms. Sharp is looking at a number of different...Ch. 13 - Prob. 25P
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