(Ignore income taxes in this problem. )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:

Question

Quizplus · Accepted Answer

To calculate the most that Charley would be willing to pay for the new computer, we need to find the present value of the cash inflows using the required rate of return of 12%. We can use the formula for the present value of an annuity to calculate this:

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

Where PV is the present value, CF1 is the cash flow in Year 1, CF2 is the cash flow in Year 2, CF3 is the cash flow in Year 3, and r is the required rate of return.

Plugging in the numbers, we get:

PV = 1600 / (1 + 0.12)^1 + 2000 / (1 + 0.12)^2 + 3000 / (1 + 0.12)^3
PV = 1600 / 1.12 + 2000 / 1.2544 + 3000 / 1.4049
PV = 1428.57 + 1593.40 + 2131.24
PV = 5153.21

Therefore, the most that Charley would be willing to pay for the new computer is $5,153. Option B ($5,159) is the closest choice.

(Ignore Income Taxes in This Problem