Smart Bumpkins wants to increase production by adding new equipment.The cost of the upgrade is $190,000 and expected cash flows from the new upgrade are expected to be as follows over the next 6 years and the risk free rate is 5%.Should the company upgrade?
$$\begin{array} { | c | c | }
\hline \text { Cash Flaws } & \text { Certainty Equivalents } \
\hline \$ 45,000 & .85 \
\hline \$ 45,000 & .80 \
\hline \$ 75,000 & .75 \
\hline \$ 110,000 & .70 \
\hline \$ 110,000 & .60 \
\hline \$ 110,000 & .50 \
\hline
\end{array}$$
A)Yes, the CNPV is $195,196.06
B)Yes, the CNPV is $83,775.16
C)No, the CNPV is -$75,522.84
D)No, the CNPV is -$42,175.93

Question

Smart Bumpkins wants to increase production by adding new equipment.The cost of the upgrade is $190,000 and expected cash flows from the new upgrade are expected to be as follows over the next 6 years and the risk free rate is 5%.Should the company upgrade?
$$\begin{array} { | c | c | } 
\hline \text { Cash Flaws } & \text { Certainty Equivalents } \
\hline \$ 45,000 & .85 \
\hline \$ 45,000 & .80 \
\hline \$ 75,000 & .75 \
\hline \$ 110,000 & .70 \
\hline \$ 110,000 & .60 \
\hline \$ 110,000 & .50 \
\hline
\end{array}$$
A)Yes, the CNPV is $195,196.06
B)Yes, the CNPV is $83,775.16
C)No, the CNPV is -$75,522.84
D)No, the CNPV is -$42,175.93

Quizplus · Accepted Answer

$$\begin{array} { | c | c | c | } 
\hline \text { Cash Flows } & \text { Certainty Equivalents } & \text { Certain Cash Flows } \
\hline 45,000 & .85 & 38,250 \
\hline 45,000 & .80 & 36,000 \
\hline 75,000 & .75 & 56,250 \
\hline 110,000 & .70 & 7,000 \
\hline 110,000 & .60 & 66,000 \
\hline 110,000 & .50 & 55,000 \
\hline
\end{array}$$ 
CF₀ = -190,000
CF₁ = 38,250
CF₂ = 36,000
CF₃ = 56,250
CF₄ = 77,000
CF₅ = 66,000
CF₆ = 55,000
I/Yr = 5
CNPV = $83,775.16

Smart Bumpkins Wants to Increase Production by Adding New Equipment