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Analysis of equipment NPV and effect on cash flow

My company is considering buying new equipment with a cost of $625,000 and a salvage value of $50,000 at the end of its useful life of ten years. The equipment is expected to generate additional annual cash flow for ten years with the following possibilities:

Probability Cash Flow

.15 $60,000
.25 $85,000
.45 $110,000
.15 $130,000

a. What is the expected cash flow?
b. If the company's cost of capital is 10%, what is the expected net present value?
c. Should the company buy the equipment?
Explain?

Solution Preview

a. What is the expected cash flow?

First, you need to calculate the additional annual cash flow for ten years by multiplying the probability with the cash flow as follows: -

Probability x Cash Flow

.15 x $60,000 = 9,000
.25 x $85,000 = 21,250
.45 x $110,000 = 49,500
.15 ...

Solution Summary

This solution is comprised of a detailed explanation to answer what is the expected cash flow, if the company's cost of capital is 10%, what is the expected net present value, and should the company buy the equipment.

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