Cooper Commons is considering purchasing new, technologically advanced solar panels. The equipment will cost $625,000 with a salvage value of $50,000 at the end of its useful life of 10 years. The excess electricity from the panels will be sold back to the current electric utility. Because the amount of electricity generated from solar panels varies with the cloud cover, the equipment is expected to generate annual cash flows with the following probabilities for the next ten years:
Probability Annual Cash Flow
a) What is the expected annual cash flow? Show the calculation
(b) Cooper’s cost of capital is 10%. What is the expected net present value of purchasing the solar panels? Show the calculation (PVIFA @ 10%, N=10; 6.1146) and Salvage (PVIFA @10%, N=10; 0.3855)
c) Should Cooper buy the solar panels? Why?