Equipment cost $625,000, salvage value $50,000 at end of 10 yrs. Probability
.15 Cash Flow $60,000, .25 $85,000, .45 110,000, .15 130,000
What is expect cash flow, How do I stretch out for 10 years do I multiply about out get that total and get PV from chat by year of the entire total?
To calculate the expected cash flow, you need to multiply each cash flow amount by its corresponding probability and then sum them up. Here's how you can do it:
1. Multiply each cash flow by its respective probability:
- 0.15 * $60,000 = $9,000
- 0.25 * $85,000 = $21,250
- 0.45 * $110,000 = $49,500
- 0.15 * $130,000 = $19,500
2. Sum up the results:
$9,000 + $21,250 + $49,500 + $19,500 = $99,250
Therefore, the expected cash flow is $99,250.
As for stretching out the cash flow over 10 years and calculating the present value (PV), you need to discount each cash flow by its respective time period. Here's how you can do it using the given information:
1. Determine the cash flow for each year:
- Year 1: $60,000
- Year 2: $85,000
- Year 3: $110,000
- Year 4: $130,000 (assuming the pattern continues)
2. Calculate the present value (PV) of each cash flow using an appropriate discount rate. This rate is usually determined by the risk associated with the investment. Let's assume a discount rate of 8% for this example.
- Year 1: $60,000 / (1 + 0.08)^1 = $55,555.56
- Year 2: $85,000 / (1 + 0.08)^2 = $73,928.02
- Year 3: $110,000 / (1 + 0.08)^3 = $91,625.74
- Year 4: $130,000 / (1 + 0.08)^4 = $104,798.51
3. Sum up the present values to get the total present value:
$55,555.56 + $73,928.02 + $91,625.74 + $104,798.51 = $325,907.83
Therefore, if you stretch out the cash flow over 10 years and calculate the present value, you get a total present value of $325,907.83