Stockholm Company is interested in buying a machine with uncertain life. The following table shows its expected life and resale value:
Expected life Probability Resale value
4 years 10% $30,000
5 years 20% $20,000
6 years 70% $10,000
The machine will save the company $40,000 annually while it is running. Stockholm will depreciate it fully on a straight-line basis in 4 years. The tax rate of Stockholm is 32%, and the proper discount rate in this case is 11%. The cost of the machine is $120,000. Should Stockholm buy it?