Question

Anthony operates a part time auto repair service. He estimates that a new diagnostic computer system will result in increased cash inflows of $1,500 in Year 1, $2100 in Year 2, and $3,200 in Year 3, If Anthony's required rate of return is 10%, then the most he would be willing to pay for the new diagnostic computer system would be (Ignore income taxes.):
Exhibit 138-1 and Exhibit 138-2, to determine the appropriate discount factor(s) using the tables provided.
a. $4,599
b. $5,501
c. $5,638
d. $5,107

Answer 1

Answer:

b

Explanation:

The highest amount he would be willing to pay should equal the present value of the cash flows

Present value is the sum of discounted cash flows

Present value can be calculated using a financial calculator

Cash flow in year 1 = $1500

Cash flow in year 2 = 2100

Cash flow in year 3 = 3200

I = 10%

PV = 5503.38

To find the PV using a financial calculator:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. after inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.  

3. Press compute