Doris Hunt is considering whether to install a drink machine at the gas station she owns. Doris
Question:
Doris Hunt is considering whether to install a drink machine at the gas station she owns. Doris is convinced 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 installed 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.
b. Use Present Value Appendix Table 2 to determine the maximum amount of cash Doris should be willing to pay for a drink machine.
c. Explain the consistency or lack of consistency in the answers to Requirement a versus Requirement b.
Salvage ValueSalvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...
Step by Step Answer:
Fundamental Managerial Accounting Concepts
ISBN: 978-1259569197
8th edition
Authors: Thomas Edmonds, Christopher Edmonds, Bor Yi Tsay, Philip Olds