8.24 (a) Determine the expected present The extra revenue is expected to be only $20,000 per year if the current slump in the industry continues. Real estate econ- omists estimate a 50% chance of the worth of the following cash flow se- ries if each series may be realized with the probability shown at the head of each column. Let i- 20% per year. (b) Determine the expected AW value for the same cash flow series. slump lasting 3 years and give it a 20% chance of continuing for 3 additional years. However, if the depressed market does improve, during either the first or second 3-year period, the revenue of the investment is expected to increase by a total of $35,000 per year. Can the com- pany expect to make a return of 8% per year on its investment? Use present worth analysis. Annual Cash Flow, Slyear Prob. = 0.2 Prob. = 0.3 Tear Prob. = 0.5 -5000 0009- 500 1500 2000 -4000 3000 100 1000 1200 1000 -800 18.27 Jeremy has $5000 to invest. If he puts the money in a certificate of deposit (CD), he is assured of receiving an effective 6.35 per year for 5 years If he invests the money in stocks, he has a 50-50 chance of one of the following cash flow sequences for the next 5 years. 8.25 A very successful health and recreation club wants to construct a mock moun- tain for climbing ane exercise outside for its customers use. Because of its lo- cation, there is a 30% chance of a 120- day season of good outdoor weather, a 50% chance of a 150-day season, and a 20% chance of a 165-day season. The mountain will be used by an estimated 350 persons each day of the 4-month (120-day) season, but hy only 100 per day for each extra day the season lasts. The feature will cost $375.000 to con- struct and require a $25.000 rework cach 4 years, and the annual mainte- nance and insurance costs will be $56,000. The climbing fee will be $5 per person. If a life of 10 years is anticipated and a 12% per year return is expected, determine if the addition is economi- Annual Cash Flow, S/year Prob. 0.5 Stock 1 Prob. = 0.5 Year Stock 2 -5000 +250 -5000 14 +600 +6800 +4000 Finally. Jeremy can invest his $5000 in real estate for the 5 years with the follow- ing cash flow and probahility estimates. Annual Cash Flow, S/year Prob. = 0.2 cally justified. Prob. = 0.3 Year Prob. = 0.5 %3D -5000 125 -S000 +300 +600 5000 8.26 The owner of Ace Roofing may invest $200,000 in new equipment. A life of 6 years and a salvage value of 12% of first cost are anticipated. The annual extra revenue will depend upon the state of the housing and construction industry. -425 +700 +800 3. -425 -425 5200 +9500 +7200
