Sam Is Considering the Purchase of a Vending Machine to Sell

question 81

Essay

Sam is considering the purchase of a vending machine to sell sodas. The cost of the vending machine is $3,400. Sam estimates that the vending machine will last for five years and will provide net income of $800 each year for its lifetime.
a. If Sam pays $3,400 for the vending machine today, what is its net present value at 7%? Should Sam purchase the vending machine?
b. If Sam pays $3,400 for the vending machine today, what is its net present value at 5%? Should Sam purchase the vending machine?
c. Suppose the seller of the vending machine allows Sam to defer, without penalty or interest, payment for the vending machine until the end of the first year. What is its net present value at 7%? Should Sam purchase the vending machine?

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Definitions:

Outstanding Checks

Checks that have been written and recorded in the issuer's accounting records but have not yet been cleared by the bank.

Automatic Transfer

A banking service that moves funds automatically from one account to another at scheduled intervals or under specific conditions.

Reconciled Balance

The balance of an account after adjustments have been made for discrepancies or outstanding items.

Bank Statement

A record provided by a bank detailing all transactions in an account over a specified period.