Exercise 10-4A Determining the present value of an annuity LO 10-1 The dean of t
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Exercise 10-4A Determining the present value of an annuity LO 10-1 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 hove been placed in other university buildings indicate that the copy machine would probably produce incremental cash inflows of approximately $25,000 per yeat 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 cesh 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 witling to pay for a copy machine. (Round your final answer to 2 decimal places) a Maximum amount (PV b Maximum amount (PVA)Explanation / Answer
(a) Annual cash flows = $25,000
Useful life of machine = 3 years
Discount rate = 8%
Calculation of present value of cash inflows
Hence, maximum amount that the dean should be willing to pay for copy machine (PV) = $64,425
(b)
Calculation of present value of cash inflows
Annual cash inflow = $25,000
PVA(8%, 3) = 2.577
Present value of cash inflows = Annual cash inflows x PVA(8%, 3)
= 25,000 x 2.577
= $64,425
Hence, maximum amount that the dean should be willing to pay for copy machine (PVA) = $64,425
Year Annual cash flows PVF(8%, 3) Present value of cash flows 1 25,000 0.926 25,000 x 0.926 = 23,150 2 25,000 0.857 25,000 x 0.857 = 21,425 3 25,000 0.794 25,000 x 0.794 = 19,850 Total $64,425Related Questions
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