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Expected annual net cash flow for the investment

MUTUALLY EXCLUSIVE INVESTMENTS HAVING
UNEQUAL LIVES:
Palmer, Inc. is considering two mutually exclusive
investments that would expand its capacity to produce golf
clubs. The firm requires a 15 percent rate of return on its
capital investments and has determined that the projects have
the following net cash flow streams.
Year A B
0 -$120,000 -$120,000
1 25,000 37,000
2 25,000 37,000
3 25,000 37,000
4 25,000 37,000
5 25,000 37,000
6 25,000
7 25,000
8 25,000
9 25,000
10 25,000

Assuming that project B can be replaced in year five at its
original cost and that the cash flows in years six through ten
will be $37,000, which project should be chosen?

EXPECTED VALUE:
Valley Sporting Goods is considering investing in a project
that will allow it to produce mid-size tennis rackets. The firm
feels that the mid-size rackets will capture a large share of the
tennis racket market but acceptance of the racket is
dependent on how quickly professional players begin using
and endorsing the new rackets. Because this factor is
unknown, Valley has estimated the following probability
distribution for the project's net cash flows. Using this
information, compute the expected annual net cash flow for
the investment.

Cash Flow Probability
$450,000 0.15
520,000 0.35
560,000 0.35
630,000 0.15

Any idea!

Solution Preview

MUTUALLY EXCLUSIVE INVESTMENTS HAVING
UNEQUAL LIVES:
Palmer, Inc. is considering two mutually exclusive
investments that would expand its capacity to produce golf
clubs. The firm requires a 15 percent rate of return on its
capital investments and has determined that the projects have
the following net cash flow streams.
Year A B
0 -$120,000 ...

Solution Summary

This provides the steps to calculate the expected annual net cash flow for the investment

$2.19