Asked by Sandra Belgarde on Jun 09, 2024
Verified
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) -$7,380.95
D) $10,000
Fixed Costs
Costs that do not vary with the level of output or sales, such as rent, salaries, and insurance premiums.
Marginal Costs
The financial outlay required to produce an additional unit of a product or service.
Cash Flows
The total amount of money being transferred into and out of a business, especially affecting liquidity.
- Evaluate the present value of financial inflows due to an investment.
Verified Answer
NE
Narjes ElkheshenJun 16, 2024
Final Answer :
B
Explanation :
The present value calculation is as follows:
PV = (25,000/(1+0.05)^1) + (30,000/(1+0.05)^2) - 45,000
PV = 23,809.52 + 26,210.89 - 45,000
PV = $4,020.41
Since the present value of the cash flows is positive, the investment is profitable. Therefore, the best choice is to invest in the new machinery. The present value of the cash flows is $51,020.41, which is greater than the cost of the machinery.
PV = (25,000/(1+0.05)^1) + (30,000/(1+0.05)^2) - 45,000
PV = 23,809.52 + 26,210.89 - 45,000
PV = $4,020.41
Since the present value of the cash flows is positive, the investment is profitable. Therefore, the best choice is to invest in the new machinery. The present value of the cash flows is $51,020.41, which is greater than the cost of the machinery.
Learning Objectives
- Evaluate the present value of financial inflows due to an investment.