Tony and Steve are considering whether to purchase a new “bending brake.” This machine puts precise bends in a material used in their vinyl siding business. The machine will cost $70,000. Tony and Steve estimate that the machine will generate profits as follows: $20,000 in its first year; $15,000 in years 2, 3, and 4; and $10,000 in years 5 and 6. They believe the machine will have no value after year 6.
a) Should they purchase the machine if they believe they can make 11% on their money in other investments of similar risk?
b) Should they purchase the machine if they believe they can make only 4% on their money in other investments of similar risk?