One-Hour Dry clean, Inc., is replacing an obsolete dry cleaning machine with one of two innovative pieces
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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:
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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?
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at... Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal...
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A Expected values of cash flows Probability 1 Cash Flow 2 3 1 2 Alternative 1 018 5000 900 064 10000 ...View the full answer
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