Expected value analysis: San Lucas Corporation

San Lucas Corporation is considering investment in robotic machinery based upon the following estimates:

Cost of robotic machinery	$4,000,000
Residual value	300,000
Useful life	10 years

Assume San Lucas Corporation assigns the following probabilities to the estimated annual net cash flows:

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

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

Annual Net Cash Flow		Expected Value
$900,000		$
700,000
500,000
Total		$

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 (Exhibit 2 and 5) provided in the chapter in determining your answer.

Net present value: $?

San Lucas Corporation is considering investment in robotic machinery based upon the following estimates:

Cost of robotic machinery	$4,000,000
Residual value	300,000
Useful life	10 years

a. Determine the net present value of the equipment, assuming a desired rate of return of 10% and annual net cash flows of $700,000. Use the present value tables appearing in Exhibit 2 and 5 of this chapter.

Net present value: $?

b. Determine the net present value of the equipment, assuming a desired rate of return of 10% and annual net cash flows of $500,000, $700,000, and $900,000. Use the present value tables (Exhibit 2 and 5) provided in the chapter in determining your answer. If required, use the minus sign to indicate a negative net present value.

Annual Net Cash Flow	$500,000	$700,000	$900,000
Net present value	$?	$?	$?

c. Determine the minimum annual net cash flow necessary to generate a positive net present value, assuming a desired rate of return of 10%. Round to the nearest dollar.

Annual Net Cash Flow: $?