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 12 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 $19,500 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.)

 

Answer 1

Requirement a:

Required rate of return: 12% Incremental cash flow: $19,500 Time: 3 years

Year	Incremental Cash flow	Present Value Table Factor	Present Value
1	$19,500	0.892857	$ 17,410.71
2	19,500	0.797194	15,545.28
3	19,500	0.711780	13,879.71
Total	Present	Value	$46,835.70

You must multiply Incremental Cash Flows by The Corresponding Present Value Factor inorder to find Present Value.

Requirement b:

Incremental Cash flow	Present Value Table Factor	Present Value
$19,500	2.401831	$46,835.70

You must multiply Incremental Cash Flow by The Corresponding Present Value Factor inorder to find Present Value.

a. The Present value is For Year 1, $17,410.71; for Year 2, $15,545.28, and For Year 3, $13,879.71. Therefore, the total Present value is $46,835.70.

b. The Total Presnt value is $46,835.70.