8. Bailey's Dance Studio is considering the purchase of new sound
equipment that will enhance the popularity of its aerobics
dancing. The equipment will cost $25,000. The owner is not sure
how many members the new equipment will attract, but she
estimates that her increased annual cash flows for each of the next
five years will have the following probability distribution. Her
cost of capital is 10 percent.
Cash Flow Probability
$3,600 .2
5,000 .3
7,400 .4
9,000 .1
a. What is the expected value of the cash flow? The value
you compute will apply to each of the five years.
b. What is the expected net present value?
c. Should she buy the new equipment?