Julio Company is considering the purchase of a new bubble packaging machine. If the machine will provide 15,000 annual savings for 8 years and can be sold for $40,000 at the end of the period, what is the present value of the machine investment at a 7% interest rate with savings realized at year end?

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Present Value

Present value (PV) is defined as the current or present value of all future sums of cash flow or money at a specified rate of return. This rate of return is known as the discounted rate, which is essentially the interest rate, discounted over some time. The expected cash flows are discounted at a discount rate to compute the present value. The higher the discount rate, the higher the future value (FV), but the lower the present value.