Question

Rose decided to buy a photocopy machine that is projected to yield cash savings of RM2,000 per year over a 20 years period. Using a 15% discount rate, calculate the present value of the savings.

(Assume that the cash savings occur at the end of the year)

Answer 1

Answer: RM25,919.89.

Explanation:

The present value of the cash savings is the sum of the present value of each year's cash savings.

To calculate this, the formula for the present value of a single cash flow is used:

Present Value = Future Value / (1 + r)^n

Where r is the discount rate, and n is the number of years.

So, for the first year's cash savings, the present value would be:

PV = 2000 / (1 + 0.15)^1 = 1739.13

For the second year's cash savings, the present value would be:

PV = 2000 / (1 + 0.15)^2 = 1510.71

This can be repeated for the remaining 18 years, and the sum of all the present values is the total present value of the cash savings over 20 years:

Total PV = 1739.13 + 1510.71 + .... + 437.66 = RM25,919.89

Therefore, the present value of the cash savings over 20 years with a 15% discount rate is RM25,919.89.

Answer 2

RM832.29

Explanation:

Calculate PV Savings

To calculate the present value of the savings, we can use the formula:

PV = cash savings / (1 + r)^t

Where PV is the present value, r is the discount rate, and t is the number of years.

Plugging in the values given in the problem, we get:

PV = RM2,000 / (1 + 0.15)^20

= RM2,000 / 1.15^20

= RM832.29

So the present value of the savings is RM832.29.