Exercise 10-4B Determining the present value of an annuity Doris Hunt is conside

Question

Exercise 10-4B Determining the present value of an annuity Doris Hunt is considering whether to install a drink machine at the gas station she owns. Doris is con- vinced that providing a drink machine at the station would increase customer convenience. However, she is not convinced that buying the machine would be a profitable investment. Friends who have in- stalled drink machines at their stations have estimated that she could expect to receive net cash inflows of approximately $10,000 per year from the machine. Doris believes that she should earn 8 percent on her investments. The drink machine is expected to have a two-year life and zero salvage value. Required Round your computations to two decimal points. a. Use Present Value Appendix Table 1 to determine the maximum amount of cash Doris should be willing to pay for a drink machine. willing to pay for a drink machine. Requirement b. b. Use Present Value Appendix Table 2 to determine the maximum amount of cash Doris should be c. Explain the consistency or lack of consistency in the answers to Requirement a versus

Explanation / Answer

maximum amount that can be $ 17,833.

b) Question is same and no appendix table 2 given hence cannot be answered.

c) Not applicable

A / 1 B C D E 2 Annual Cash inflow     10,000 3 Life                2 Years 4 Expected rate of return 8% 5 Salvage value               -   6 Present Value=     17,833 =-PV(C4,C3,C2,0,0) 7

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