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 $20,000 per year. The machine is expected to have a three-year useful life with a zero salvage value.
We have been provided with the information that,
return on the investment of funds is 8%
produce incremental cash inflows of approximately $20,000 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 prasent value of machine and maximum amount of cash the dean should be willing to pay for a copy machine. as follow
| Year | Cash flow | PV factor @8% |
Pv of cash flow |
| 1 | 20,000 | 0.925925926 | 18518.51852 |
| 2 | 20,000 | 0.85733882 | 17146.77641 |
| 3 | 20,000 | 0.793832241 | 15876.64482 |
| 51541.93974 |
From the above calculation we could see that NPV of the project is $ 51541.94. So maximum price DEAN should pay is $ 51541.94
