Assume Boulder Creek Industries in MAD 26-3 assigns the following probabilities to the estimated annual net cash flows:

a. Compute the expected value of the annual net cash flows.

b. Determine the expected net present value of the equipment, assuming a desired rate of return of 12% and expected annual net cash flows computed in part (a). Use the present value tables (Exhibits 2 and 5) provided in the chapter in determining your answer.

c. Based on your results in parts (a) and (b), should Boulder Creek Industries invest in the equipment?

Exhibit 2:

Exhibit 5:

Transcribed Image Text:

Probability of Occurring Annual Net Cash Flow $800,000 0.60 600,000 0.25 400,000 0.15 Total 1.00 Present Value of $1 at Compound Interest Year 6% 10% 12% 15% 20% 0.943 0.890 0.840 0.909 0.826 0.893 0.797 0.870 0.833 0.694 0.579 0.482 0.756 3 0.751 0.683 0.621 0.564 0.712 0.636 0.567 0.507 0.452 0.404 0.658 4 0.792 0.747 0.705 0.665 0.627 0.592 0.558 0.572 0.497 0.432 0.376 0.327 0.284 0.247 0.402 0.335 0.279 0.513 8 0.233 0.467 0.424 0.386 0.361 0.322 0.194 0.162 10