A machine costs $15,000 with a net income of $6,000 in year 1 and year 2, $2,500 in year 3, and $2,500 in year 4. The salvage value is $2,000. Should we buy the equipment if we can borrow money at 15%?

To determine whether to buy the equipment, we can calculate the net present value (NPV) of the cash flows generated by the machine, considering the cost of borrowing at 15%.

The initial investment is $15,000, and the expected cash flows from net income over four years amount to $6,000 for each of the first two years and $2,500 for each of the last two years, along with a salvage value of $2,000 at the end of year four.

To find the NPV, each cash flow must be discounted back to present value using the 15% interest rate. The calculations would demonstrate how much the future cash flows are worth in today’s dollars compared to the initial investment.

Calculating the present values:

• Year 1: $6,000 / (1 + 0.15)^1

• Year 2: $6,000 / (1 + 0.15)^2

• Year 3: $2,500 / (1 + 0.15)^3

• Year 4: $2,500 / (1 + 0.15)^4

• Additionally, the salvage value of $2,000 should also be discounted to