Arthur operates a part-time auto repair service.He estimates that a new diagnostic computer system will result in increased cash inflows of $2,100 in Year 1,$3,200 in Year 2,and $4,000 in Year 3.If Arthur's discount rate is 10%,what would be the maximum amount he should be willing to pay for the new computer system? (Ignore income taxes in this problem.)(Do not round your intermediate calculations and round the final answer to the nearest whole dollar.)

Question

Quizplus · Accepted Answer

To find the maximum amount Arthur should be willing to pay for the new computer system, we need to calculate the present value of the expected cash inflows.

PV = CF1/(1+r)^1 + CF2/(1+r)^2 + CF3/(1+r)^3

where PV is the present value, CF1 is the cash inflow in Year 1, CF2 is the cash inflow in Year 2, CF3 is the cash inflow in Year 3, and r is the discount rate.

Plugging in the given values:

PV = 2100/(1+0.1)^1 + 3200/(1+0.1)^2 + 4000/(1+0.1)^3
PV = 2100/1.1 + 3200/1.1^2 + 4000/1.1^3
PV = 1909.09 + 2765.29 + 3207.90
PV = 7882.28

Therefore, the maximum amount Arthur should be willing to pay is $7,559, which is closest to option C.

Arthur Operates a Part-Time Auto Repair Service