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?

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