5. Management is considering the purchase of a new machine for a cost of $65,000. It is estimated that the machine will generate positive net cash flows of $12,000 per year for eight years and will be sold for salvage at the end of that time for $2,500. Assuming a return of 9% compounded annually, determine if management should purchase this machine by finding the present value of the future cash flows (round to the nearest whole dollar; circle the answer that is closest to your calculation of present value of future cash flow). a. $68,918 b. $67,673 c. $66,418 d. $6,022 e. $1,255

The present value of future cash flows can be determined by adding the discounted cash flows together. The cash flows in this question are the positive net cash flows the machine would generate and the salvage value of the machine at the end of eight years.

The formula that can be used to determining the present value of a cash flow is:

Present value = [tex]\frac{FV}{(1 + r)^{n} }[/tex]

Where:

FV -= cash flow in a year
r = rate of return
n = year

Present value of the cash flows = [tex]\frac{12000}{1.09}[/tex] + [tex]\frac{12000}{1.09^{2} }[/tex] + [tex]\frac{12000}{1.09^{3} }[/tex] + [tex]\frac{12000}{1.09^{4} }[/tex] + [tex]\frac{12000}{1.09^{5} }[/tex] + [tex]\frac{12000}{1.09^{6} }[/tex] + [tex]\frac{12000}{1.09^{7} }[/tex] + [tex]\frac{12000}{1.09^{9} }[/tex] + [tex]\frac{2,500}{1.09^{8} }[/tex] = $67,673

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