Question

A cloth manufacturing firm is deciding whether or not to invest in new machinery. The machinery costs $45,000 and is expected to increase cash flows in the first year by $25,000 and in the second year by $30,000. The firm’s current fixed costs are $9,000 and current marginal cost are $15. The firm currently charges $18 per unit. ​ If the cost of capital is 5% then the net present value of the investment is a. ​$10,000 b. ​-$7,380.95 c. ​$7,380.95 d. ​$6,020.41

Answer 1

Answer:

$51,020.41

Explanation:

The net present value is the present value of after tax cash flows from an investment less the amount invested.

PV = FV × (1 + r) ^ (-n) 

PV = 25,000 (1 + 5%) ^ (-1) + 30000 (1 + 5%) ^ (-2)

= 51020.41

Where PV = present value

FV = Future value = 25,000 In year 1 and 30,000 In year 2

I = interest rate = 5%

N = time = 1 ,2

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