You manage a resort and are considering installing one of two different vending machines, Soda or Candy. The net cash flow for each machine stays the same for each of the four years that it lasts. Key information about each machine is below. Cash flows and probabilities are matched on top of each other.
Soda
Purchase price: $10,000
Salvage Value: $0
Expected Net Cash flow in each of the next 4 years: 6000,5000,4000
Probability of Occurrence: .25 .50 .25
Candy
Purchase price: $11,000
Salvage Value: $0
Expected Net Cash flow in each of the next 4 years: 7000,5000,4000
Probability of Occurrence: .25 .50 .25
The current risk free rate is 10%. The lender uses the below table to assign an additional risk premium to loans to the resort.
Standard Deviation Risk Premium
$0-999 0%
1000-1999 4%
2000-2999 10%
3000-3999 20%
Prepare a recommendation as to which machine to install at the resort. Hint- Several things need to be done to make this recommendation.