You are thinking of building a new machine that will save you $4,000 in the first year

Finance Nov 13, 2020

You are thinking of building a new machine that will save you $4,000 in the first year. The machine will then begin to wear out so that the savings decline at a rate of 1% per year forever. What is the present value of the savings if the interest rate is 3% per?year?

Expert Solution

g = Growth = -1%r = Interest rate = 3%Present value of savings = Saving at the end of year 1 / ( r - g ) = 4000 / ( 3% - -1% ) =100000

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