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Golden Corporation is considering the purchase of new, technologically advanced thin film solar panels costing $80,000. The excess electricity from the panels will be sold back to the current electric utility and will generate positive cash flows. The expected life of the equipment is 10 years and the equipment will have $0 salvage value.

The equipment will be depreciated using straight line depreciation. Golden's cost of capital is 14%. Because the amount of electricity generated from solar panels varies with the cloud cover and the climate is changing, the equipment is expected to generate annual cash inflows with the following probabilities for the next ten years:

Weather Probability Annual Cash Flow

Cloudy 0.3 ($15,000)

Normal 0.5 $25,000

Sunny 0.2 $35,000

a) What is the expected NPV of this purchase?

b) Should Golden purchase the solar cells?

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M944068

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