# Making Calculations Based on Expected Cash Flows

The XYZ Company has estimated the expected cash flows [in thousands] for 1996 to be as follows:

Probability Cash Flow

10 10

15 140

50 150

15 180

10 210

Calculate:

a. Expected value

b. Standard deviation

c. Coefficient of variation

d. If the true cash flows are normally distributed with the mean from (a) and standard deviation from (b), what is the probability that the true cash flow will be less than $100,000?

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#### Solution Preview

Given the probabilities and cash flows, you will use the following formulas where Pi = probability, CFi = cash ...

#### Solution Summary

This solution provides a calculation of how you calculate the expected value of cash flows, the expected standard deviation, of a calch the coefficient of variation and cash flow of series of cash flow.

Cash Flow

7.) X-treme Vitamin Company is considering two investments, both of which cost $10,000. The cash flows are as follows:

1.

Year Project A Project B

1 $12,000 $10,000

2 8,000 6,000

3 6,000 16,000

a. Which of the two projects should be chosen based on the payback method?

b. Which of the two projects should be chosen based on the net present value method? Assume a cost of capital of 10 percent.

c. Should a firm normally have more confidence in answer a or answer b?

15.) The Danforth Tire Company is considering the purchase of a new machine that would increase the speed of manufacturing and save money. The net cost of this machine is $66,000. The annual cash flows have the following projections.

1.

Year Cash Flow

1 $21,000

2 29,000

3 36,000

4 16,000

5 8,000

a. If the cost of capital is 10 percent, what is the net present value?

b. What is the internal rate of return?

c. Should the project be accepted? Why?