Ed’s Electronic Devices has an asset beta of 1.2. The market rate of r

Ed’s Electronic Devices has an asset beta of 1.2. The market rate of return is 12% and the risk-free rate of return is 2%. Ed is considering updating his production technology.

If he does so, he expects the cash streams indicated in the table below. Given this information, should Ed update his production technology? Year Cashflow Present Value 0 -$100,000 1 $25,000 2 $25,000 3 $25,000 4 $25,000 5 $25,000 6 $25,000 Total

ANSWER

The present value of the cash flow is given in the table below. As indicated in the table, the net present value of the cash flow is negative. This implies that Ed should not update his production technology.

Year Cash Flow Present Value
0 -$100,000 -$100,000
1 $25,000 $21,929.824
2 $25,000 $19,236.688
3 $25,000 $16,874.287
4 $25,000 $14,802.007
5 $25,000 $12,984.217
6 $25,000 $11,389.664
Total -$2,783.32