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 costs are $15. The firm currently charges $18 per unit. If the interest rate is 5% then the present value of the cash flows is

a. 6,020.41
b. 51,020.41
c. -7380.95
d. 10,000

Answer 1

b. $51,020.41

Step-by-step explanation:

PV= present value

FV= future value

r= rate

n= time

We use the formula PV = FV × (1 + r)^(-n) for finding the present value

There are two cash flows, one that occur in year 1 at 25000 and 2nd that occur in year 2 at 30000.

Find the PV of this cash flow at r = 5% and n = 1 and n= 2

PV = 25000(1+5%)^(-1) + 30000(1 + 5%)^(-2)

= 51020.41

Select B.

Answer 2

correct option is b i.e 51020.41

Step-by-step explanation:

Given Data:

Machinery cost $45000

cash flow in first year = $25000

cash flow in second year $30000

Interest rate is 5%

we know that present value can be obtained by using following relation

`PV = FV * (1+r)^(n)`

where PV is present value

FV is future value

Therefore present value is computed as

`PV = 25000*(1+0.05)^(-1) + 30000 (1+0.05)^(-2)`

PV = 51020.41

Therefore correct option is b i.e 51020.41