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 10 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 $18,500 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

In order to find out the maximum value that the dean must pay for the copy machine we need to calculate the NPV of cash inflows .

In order to calculate NPV we need to use the following formula:

now, while calculating the npv of total cash inflow we will take inial investment as 0, i =10% cash inflow = 18500

NPV = 18500/(1+.1)^1 + 18500/(1+.1)^2 + 18500/(1+.1)^3

=46006.76

Hence the maximum amount the dean should pay is $46006.76(because then the total inflow =total outflow)