### Computation of present value of cash flows to make purchase

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Computation of present value of cash flows to make purchase decision

Currently, demand is so high for Anderson Electric's products that the company cannot manufacture enough inventory to satisfy demand. Consequently, Anderson is considering purchasing a new machine that will increase its production level. The firm's management estimates that the new machine will generate the following net cash flows during its lifetime:

 Year Net Cash Flow, CF 1 \$18,000 2 12,000 3 15,000 4 10,000 5 10,000 6 10,000

a. If Anderson normally requires a 12 percent return from such projects, what is the maximum amount it should pay for the machine?

b. How would your answer to part (a) change if the appropriate rate of return is 15 percent?

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