Cheng Incorporated is considering the purchase of a new piece of equipment. It would cost $150 and be depreciated over a life of 5 years to a zero salvage value using the straight-line method. If the purchase is made, Cheng estimates the following probability distribution of revenues less operating expenses for each year:

Prob S-C

45% 10

10% 50

45% 100

a} Assume that Cheng operates only in one industry and is not diversified.

Cheng has a marginal tax rate of 40% and the new investment would require additional net working capital of $50. The risk-free rate is 5%, the investment