Charley has a typing service. He estimates that a new computer will result in in
ID: 2490103 • Letter: C
Question
Charley has a typing service. He estimates that a new computer will result in increased cash inflow $2,200 in Year 1, $2,600 in Year 2 and $4,000 in Year 3. (Ignore income taxes.)
Click here to view Exhibit 13B-1 to determine the appropriate discount factor(s) using tables.
If Charley's required rate of return is 6%, the most that Charley would be willing to pay for the new computer would be: (Round discount factor(s) to 3 decimal places, intermediate and final answers to the nearest dollar amount.)
Charley has a typing service. He estimates that a new computer will result in increased cash inflow $2,200 in Year 1, $2,600 in Year 2 and $4,000 in Year 3. (Ignore income taxes.)
Explanation / Answer
NPV =CF1/(1+r)1+CF2/(1+r)2 + CF3/(1+r)3 =2200/(1+0.06)1+2600 /(1_0.06)2+4000/(1+0.06)3 =2200 /1.06 + 2600/1.124 + 4000 /1,191 = 7747 Hence Charlie will be willing to pay maximum 7747 for the computer, because at this price NPV =0 and there would not be a negative NPV