Task 1: 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?
Task 2: 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