Chapter 14.A, Problem 5E

Exercises 13A-5 Basic Present Value Concepts L013-7

The Atlantic Medical Clinic can purchase a new computer system that will save $7,000 annually in billing costs. The computer system will last for eight years and have no salvage value.

Required:

What is the maximum price (i.e, the price that exactly equals the present value of the annual savings in billing costs) that the Atlantic Medical Clinic should be willing to pay for the new computer system if the clinic's required rate of return is:

1. Sixteen percent?
2. Twenty percent?