Question

Consider adopting a cost-reducing technology that lowers annual production costs by $1000 per year (into perpetuity, starting in year 1). If your opportunity cost of time is captured by a discount rate of 5%, what is the present) value of adopting the technology?

Answer 1

Answer:

$20,000

Explanation:

Present Value of Perpetuity = Annuity / ( Interest rate-Growth rate). Where Annuity=1000, Interest rate=5%, Growth rate=0

Present Value of Perpetuity = $1,000/(0.05-0)

Present Value of Perpetuity = $1,000/0.05

Present Value of Perpetuity = $20,000

So, the present) value of adopting the technology is $20,000.