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11 October, 17:46

You are thinking of building a new machine that will save you $ 2 comma 000 in the first year. The machine will then begin to wear out so that the savings decline at a rate of 4 % per year forever. What is the present value of the savings if the interest rate is 7 % per year?

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  1. 11 October, 18:25
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    Present Value = $18,181.82

    Explanation:

    Giving the following information:

    Savings = $2,000

    The machine will then begin to wear out so that the savings decline at a rate of 4 % per year forever.

    Interest rate = 7%

    To determine the present value of the savings, we need to use the perpetual annuity formula with the decline rate.

    PV = Cf / (i + g)

    Cf = cash flow

    PV = 2,000 / (0.07 + 0.04)

    PV = $18,181.82
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