Cooper Construction is considering purchasing new, technologically advanced equipment. The equipment will cost $625,000 with a salvage value of $50,000 at the end of its useful life of 10 years. The equipment is expected to generate additional annual cash inflows with the following probabilities for the next ten years:
Probability
Cash Flow
0.15
60,000
0.25
85,000
0.45
110,000
0.15
130,000
a) What is the expected cash flow?
b) Cooper's cost of capital is 10%. What is the expected net present value?
c) Should Cooper buy the equipment?