Value an umbrella stand that sells 50 umbrellas when it is rainy and 0 when not.

Question

Value an umbrella stand that sells 50 umbrellas when it is rainy and 0 when not. The probability of rain is 0.3. There are 365 days per year. Each umbrella sells for $5 and costs $1 to make. The business lasts 2 years and the weighted average cost of capital is 10% per year. Calculate the discounted cash flow and show all work. Value an umbrella stand that sells 50 umbrellas when it is rainy and 0 when not. The probability of rain is 0.3. There are 365 days per year. Each umbrella sells for $5 and costs $1 to make. The business lasts 2 years and the weighted average cost of capital is 10% per year. Calculate the discounted cash flow and show all work.

Explanation / Answer

expected sales per day = 50*0.3 = 15

expected profit per year in dollar terms = 15*365*(5 - 1) = 21,900

value of an umbrella stand = 21,900/1.10 + 21,900/1.102 = 38,008.26

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