Ignore income taxes in this problem Peter wants to buy a com

(Ignore income taxes in this problem.) Peter wants to buy a computer which he expects to save him $9,000 each year in bookkeeping costs. The computer will last for five years, and at the end of five years it will have no salvage value. If Peter\'s required rate of return is 5%, what is the maximum price Peter should be willing to pay for the computer now?

Click here to view Exhibit 8B-1 and Exhibit 8B-2 to determine the appropriate discount factor(s) using tables.

$45,000

$38,961

$35,881

$35,371

Solution

Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate

=$9000[1-(1.05)^-5]/0.05

=$9000*4.329

=$38961(Approx).