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# expected NPV criterion

I cannot find any help in the textbook for this problem. As I'm taking an online course, finding alternative forms of help proves difficult. Here's the problem:

Mud Construction Co. 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?

#### Solution Preview

Hello!

Question A
The expected value of the cash flow is calculated as the sum of each possible cash flow multiplied by its probability. So the expected cash flow in this case would be:

0.15*60000 + 0.25*85000 + 0.45*110000 + 0.15*130000 = \$99,250.

Question B
Let's first write the (expected) cash flows from this ...

#### Solution Summary

This job uses expected NPV criterion.

\$2.19