Question

7) You are thinking of building a new machine that will save you $50,000 in the first year. The machine will then begin to wear out so that the savings decline at a rate of 2.5 percent per year forever. What is the present value of the savings if the discount rate is 8 percent per year?\

Answer 1

Answer:

$476190.47

Explanation:

Given,

Annual Saving = $50,000.

Growth = -2.5%

Interest rate = 8%

Present value of savings = Annual Saving / (Interest rate- Growth)

= $50,000 / (0.08-(-0.025)

= $50,000 / (0.08+0.025)

= $50,000 / 0.105

= $476190.47.

Therefore, the present vaue of the savings is $14,285.71.