A project requires an initial investment of $$100,000$ to purchase equipment. The

equipment will be depreciated on a straight$-$line basis over the five$-$year life of the

project. The company expects the project to generate $$50,000$ of additional revenue per

year and $$15,000$ of additional expenses per year. Management is also concerned about

potential product liability losses. The company's risk manager developed the following

annual loss distribution:

Loss Amount Probability

a$.$ Calculate the project's net present value assuming the company has a required return

of $10\%$ and faces a marginal tax rate of $40\%.$

b$.$ Should the company invest the $$100,000$ to buy the equipment? As part of your

answer, explain the risk involved when using expected loss amounts in capital

budgeting and how the cost of worry could be used to modify the calculation of net

present value in part a$.$

c$.$ Calculate the breakeven cost of worry, that is$,$ above this amount the project will not

be accepted, and below this amount the project will be accepted.