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    Expected annual net cash flow for the investment

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    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!

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    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

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