Question 4 (10 Marks)

A firm must decide whether or not to purchase a new machine. The machine will reduce costs by RM2,000 in the first year, RM2,500 in the second, and RM3,000 in the third and final year of usefulness. The machine costs RM9,000 today, while the above cost savings will be realized at the end of each year. If the interest rate is 7 percent:

1. What is the net present value of purchasing the machine?
2. Should firm buy the machine?