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What is the maximum amount the dean should be willing to pay for a new copy machine if he wants to earn an 8% return at a present value of $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 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.
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If you check an annuity table the factor for 3 years at 8% is 2.57710. So discounting the 20,000 cash inflows we have $51542. So if he wants a PV of $1 he should be willing to pay $51541 for it.