1. A government agency must decide whether to buy a computer which costs $80,000. The machine is likely to be obsolete at the end of three years, with no salvage value. During those years it will return annual net benefits (i.e., benefits over and above operating expenses) of $40,000 at the end of the first year; $40,000 at the end of the second year; and $20,000 at the end of the third year. At a 5% discount rate, what is the present value of the net benefits? Should the agency buy this computer? 2. What is the present value of the net benefits of the computer in #1 if the discount rate is 10%? 3. What is the present value of the net benefits of the computer in #1 if the discount rate is 15%?
1. A government agency must decide whether to buy a computer which costs $80,000. The machine is likely to be obsolete at the end of three years, with no salvage value. During those years it will return annual net benefits (i.e., benefits over and above operating expenses) of $40,000 at the end of the first year; $40,000 at the end of the second year; and $20,000 at the end of the third year. At a 5% discount rate, what is the present value of the net benefits? Should the agency buy this computer? 2. What is the present value of the net benefits of the computer in #1 if the discount rate is 10%? 3. What is the present value of the net benefits of the computer in #1 if the discount rate is 15%?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:1. A government agency must decide whether to buy a computer which costs $80,000. The
machine is likely to be obsolete at the end of three years, with no salvage value. During those
years it will return annual net benefits (i.e., benefits over and above operating expenses) of
$40,000 at the end of the first year; $40,000 at the end of the second year; and $20,000 at the end
of the third year.
At a 5% discount rate, what is the present value of the net benefits? Should the agency
buy this computer?
2. What is the present value of the net benefits of the computer in #1 if the discount rate is 10%?
3. What is the present value of the net benefits of the computer in #1 if the discount rate is 15%?
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