Assume San Lucas Corporation in MAD 26-1 assigns the following probabilities to the estimated annual net cash

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Assume San Lucas Corporation in MAD 26-1 assigns the following probabilities to the estimated annual net cash flows:

Annual Net Cash Flow Probability of Occurring $900,000 0.10 700,000 500,000 0.50 0.40 Total 1.00


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 10% and the 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 San Lucas Corporation invest in the equipment?


Exhibit 2:

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


Exhibit 5:

Net Present Value
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...
Corporation
A Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may...
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Forensic And Investigative Accounting

ISBN: 9780808056300

10th Edition

Authors: G. Stevenson Smith D. Larry Crumbley, Edmund D. Fenton

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