PROB 1. Present value of an ordinary annuity due.

Jill Morris is planning to purchase an array of small business equipments from Eller Office Equipment Company. He expects to generate an income of $4,000 at the end of each year for the next 10 years from the use of these equipments. The market rate of interest for small equipment loans is 8%. The following 8% interest factors are given to you.

9 Periods10 Periods11 Periods

Future Value of 11.999002.158922.33164

Present Value of 1.50025.46319.42888

Future Value of Ordinary Annuity of 112.4875614.4865616.64549

Present Value of Ordinary Annuity of 16.246896.710087.13896

Present Value of Annuity Due of 16.746647.246897.71008

Instructions

(a)Assuming the equipments have a ten-year life and will have no salvage value at the expiration of the period of life what would be the maximum price he would be willing to pay for the equipments now?

(b)What amount would he be willing to pay if the annual inflows of cash could be received at the beginning of each year?