Larry's Athletic Lounge is considering an expansion program to increase the sophistication of the exercise equipment. The

Question:

Larry's Athletic Lounge is considering an expansion program to increase the sophistication of the exercise equipment. The equipment will cost $20,000 and has an estimated life of five years. Larry is not sure how many members the new equipment will attract, but he estimates that his increased annual cash flows for each of the next five years will have the following probability distribution. Larry's cost of capital is 14 percent.
Probability ............Cash flow
.2 ............................$2,400
.4 ............................. 4,800
.3 ..............................6,000
.1 ..............................7,200
a. What is the expected cash flow?
b. What are the expected NPV and IRR?
c. Should Larry buy the new equipment?

Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...

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