# 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