Cheng Incorporated is considering the purchase of a new piece of equipment. It w

Question

Cheng Incorporated is considering the purchase of a new piece of equipment. It would cost $150 and be depreciated over a life of 5 years to a zero salvage value using the straight-line method. If the purchase is made, Cheng estimates the following probability distribution of revenues less operating expenses for each year:

Prob     S-C

45%       10

10%        50

45%         100

a} Assume that Cheng operates only in one industry and is not diversified.

Cheng has a marginal tax rate of 40% and the new investment would require additional net working capital of $50. The risk-free rate is 5%, the investment

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Cheng Incorporated is considering the purchase of a new piece of equipment. It w

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