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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?

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