Determining the present value of an annuity Ramona Oblawski is considering whether to install a drink machine at the gas station she owns. Ramona 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 $4,000 per year from the machine. Ramona believes that she should earn 10 percent on her investments. The drink machine is expected to have a two-year life and zero salvage value.

Required

a. Use Present Value Table 1 to determine the maximum amount of cash Ramona should be willing to pay for a drink machine.

b. Use Present Value Table 2 to determine the maximum amount of cash Ramona 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.