Final answer:
To decide whether the firm should make the investment, we calculate the present value of the expected cash flows and compare it to the initial cost. The sum of the present values is greater than the initial cost, so the firm should make the investment.
Step-by-step explanation:
To decide whether the firm should make the investment, we need to calculate the present value (PV) of the expected cash flows and compare it to the initial cost. First, we calculate the PV of each year's cash flow using the formula PV = CF / (1+r)^n, where CF is the cash flow, r is the required rate of return, and n is the number of years. For example, for Year 1, the PV = 50,000 / (1+0.08)^1 = 46,296.30. Similarly, for Year 2, the PV = 60,000 / (1+0.08)^2 = 51,748.97. And for Year 3, the PV = 70,000 / (1+0.08)^3 = 54,797.87. Then, we sum up the PVs of the cash flows: 46,296.30 + 51,748.97 + 54,797.87 = 152,843.14.
Next, we compare the sum of the PVs to the initial cost of $50,000. If the sum of the PVs is greater than the initial cost, the firm should make the investment. In this case, 152,843.14 > 50,000, so the firm should make the investment.