Answer :
The present value of the purchase of the lathe is £102,335.32 to the nearest £10.
How do we calculate?
We have the cash flows for the lathe as:
Year 1: £33,000
Year 2: £33,000
Year 3: £33,000
Year 4: £20,000
Present value
= CF1 / (1 + r)[tex]^1[/tex] + CF2 / (1 + r)² + CF3 / (1 + r)[tex]^3[/tex] + CF4 / (1 + r)[tex]^4[/tex]
Present value
= £33,000 / (1 + 0.07)[tex]^1[/tex] + £33,000 / (1 + 0.07)² + £33,000 / (1 + 0.07)[tex]^3[/tex] + £20,000 / (1 + 0.07)[tex]^4[/tex]
Present value
= £30,841.12 + £28,824.08 + £27,007.16 + £15,662.96
Present value = £102,335.32
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