Question: 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
1) What is the expected cash flow?
2) If the company's cost of capital is 10%, what is the expected net present value?
3) Should the company buy the equipment? Explain?