If i buy a machine it will save me $1000 each year for 3 years. If the interest rate is 8% what is the most I should pay for the machine?
1000/.08 = 12500.
To calculate the most you should pay for the machine, you need to consider the present value of the future savings generated by the machine over a period of 3 years, taking into account the interest rate of 8%.
The formula to calculate the present value is:
PV = CF / (1 + r)^n
Where:
PV = Present Value (maximum amount you should pay for the machine)
CF = Cash flow (savings per year)
r = Interest rate per period (in this case, 8% or 0.08)
n = Number of periods (in this case, 3 years)
Plugging in the values:
PV = 1000 / (1 + 0.08)^3
Simplifying the equation:
PV = 1000 / (1.08)^3
PV = 1000 / 1.2597
PV ≈ $794.35
Therefore, the most you should pay for the machine is approximately $794.35 to justify the given savings of $1000 per year for 3 years with an interest rate of 8%.