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 $17,500 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 a. 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.) b. 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.) a. Maximum amount (PV) b. Maximum amount (PVA)

Answer 1

a ) ans:

We have been provided with the information that,

return on the investment of funds is 6%

produce incremental cash inflows of approximately $17,500 per year

The machine is expected to have a three-year useful life

So n =3 year

Salvage value =0 year

Now with all these information we will calculate the present value of machine and maximum amount of cash the dean should be willing to pay for a copy machine. as follows

Year	Cash flow	PV factor @6%	Pv of cash flow
1	17,500	0.9434	16,509.50
2	17,500	0.8900	15,575
3	17,500	0.8396	14,693
		2.6730	46777.50

From the above calculation we could see that NPV of the project is $ 46777.50. So maximum price DEAN should pay is $ 46777.50

b) Ans ;

Same as of A no change Maximum amount of PVA = 46777.50

annual investment cash flow =$17,500

Life of Machine = 3 year

Rate of Return @ 6 %

PVA factor @ 6% for 3rd year = 2.6730 *17500 = 46777.50