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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)$6,020.41
B)$7,380.95
C)-$7,380.95
D)$10,000

Question

​Use the following setup for 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)​$6,020.41
B)$7,380.95
C)-$7,380.95
D)​$10,000

Quizplus · Accepted Answer

The net present value (NPV) is calculated by discounting the future cash flows back to their present value and subtracting the initial investment. The cash flows in the first year ($25,000) and the second year ($30,000) are discounted back at the cost of capital (5%). The NPV calculation is as follows:Year 1: $25,000 / (1 + 0.05)^1 = $23,809.52Year 2: $30,000 / (1 + 0.05)^2 = $27,210.88Total NPV = $23,809.52 + $27,210.88 - $45,000 = $6,020.40 (rounded to $6,020.41 due to rounding in intermediate steps).

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Use the Following Setup for Question