Question

the dean of the School of Fine Arts is trying to decide whether to purchase a copy machine to place in the lobby of the building. The machine would add to student convenience, but the dean feels compelled to earn an 8 percent return on the investment of funds. Estimates of cash inflows from copy machines that have been placed in other university buildings indicate that the copy machine would probably produce incremental cash inflows of approximately $25000 per year. The machine is expected to have a three-year useful life with a zero salvage value.

Use Present Value PV of $1 to determine the maximum amount of cash the dean should be willing to pay for a copy machine. (Round intermediate calculations and final answer to 2 decimal places.)

Answer 1

Annual cash inflows = $25,000

Time period (n) = 3 years

Interest rate (r) = 8%

Present value of cash inflows = Annual cash inflows x Present value annuity (r%,n)

= 25,000 x Present value annuity (8%,3)

= 25,000 x 2.57710

= $64,427.50

Hence, Dean should be willing to pay for copy machine = $64,427.50

Note: Exact answer may slightly differ due to rounding off and factor value considered

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