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 6 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 $18,000 per year. The machine is expected to have a three-year useful life with a zero salvage value. (Use appropriate factor(s) from the tables provided.)

Required

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

2. Use Present Value Appendix PVA of $1, to determine the maximum amount of cash the dean should be willing to pay for a copy machine. (Round your final answer to 2 decimal places.)

Answer 1

a.

Each year incremental cash flow is multiplied by present value factor to get the discounted values and the sum of discounted value is the maximum amount that can be paid by the dean.

b.

As per the present value annuity factor method,Each year increment cash flow is multiplied by PVAF to get the maximum amount that dean can pay.