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 $25,000 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

Solution

A. By Using Present Value Appendix PV of $1, for determining the maximum amount of cash the dean should be willing to pay for a copy machine

The Maximum amount of cash that dean shouls be wiling to pay for a copy of machine is the Present value of all Cash Flows in 3 years discounting @ 8%. Calculations are shown below

Year	Cash Flow	PVF @ 8%	Present Value
1	$25000	0.926	$23150
2	$25000	0.857	$21425
3	$25000	0.794	$19850
			$64425

The Maximum Amount that dean should be willing to pay for a copy machine is $64425 by using PV of $1

B. By Using Present Value Appendix PVA of $1, for determining the maximum amount of cash the dean should be willing to pay for a copy machine

= Cash Flows * PVAF (Return on Investment, n Period)

= $25000 * PVAF (8%, 3Yrs)

= $25000 * 2.577

= $64425

The Maximum Amount that dean should be willing to pay for a copy machine is $64425 by using PVA of $1