Question

Charley has a typing service. He estimates that a new computer will result in increased cash inflow $1,600 in Year 1, $2,000 in Year 2 and $3,000 in Year 3. If Charley's required rate of return is 12%, the most that Charley would be willing to pay for the new computer would be:A. $4,623B. $5,159C. $3,294D. $4,804

Answer 1

$5,159

Step-by-step explanation:

The amount Charlie would be willing to pay can be found by discounting the future cash flow to its present value

The present value of $1600 in year 1, discounted at 12% = $1429

The present value of $2000 in year 2, discounted at 12% = $1,594

The present value of $3000 in year 3, discounted at 12% = $2,135

The amount Charlie would be willing to pay =

$1429+ $1,594 + $2,135 = $5158

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