A company is considering whether to buy a new machine, which costs $97,000. The cash flows (adjusted for taxes and depreciation) that would be generated by the new machine are given in the following table: 

(a) Find the total present value of the cash flows. Treat each year’s cash flow as a lump sum at the end of the year and use an interest rate of 7.5% per year, compounded annually.

(b) Based on a comparison of the cost of the machine and the present value of the cash flows, would you recommend purchasing the machine?

Year Cash flow 1 2 $50,000 $40,000 3 4 $25,000 $20,000