You are the manager of a local factory that produces plastic bottles for soft drink manufacturers. Your assistant comes to you with exciting news about a new assembly line for the company. He presents the following data to you that he’s researched:

            Estimated life of assembly line:             4 years

            Initial investment cost:                         $800,000

            Estimated salvage value:                       none

            Estimated Cash Flow Analysis

            Year                                        Expected Cash Flow

            1                                              $450,000

            2                                              240,000

            3                                              150,000

            4                                                  60,000

a) If the current interest rate is 3 percent, use net present value analysis to determine whether or not the company should purchase this new machine.

b) Ceteris paribus, what is the relationship between the interest rate and the present value of a given amount of money? What does “present value” even mean?