(Ignore income taxes in this problem.) Peter wants to buy a computer which he expects to save him $4,000 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 12%, what is the maximum price Peter should be willing to pay for the computer now?

Question

Quizplus · Accepted Answer

Using the present value formula, we can calculate the maximum price Peter should be willing to pay:

PV = (CF1/1+r) + (CF2/((1+r)^2)) + ... + (CFn/((1+r)^n))

where PV is the present value, CF is the cash flow, r is the required rate of return, and n is the number of years.

Substituting the values from the problem, we get:

PV = (4000/1.12) + (4000/1.12^2) + (4000/1.12^3) + (4000/1.12^4) + (4000/1.12^5)
PV = $14,420

Therefore, the maximum price Peter should be willing to pay for the computer now is $14,420, which is choice B.

(Ignore Income Taxes in This Problem