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. Required:
If the interest rate is 5% then. what is the present value of the cash flows?

$51,020.40

Explanation:

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 $25,000 and second that occur in year 2 at $30,000.

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

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

25,000(1+0.05)^-1 + 30,000(1 + 0.05)^-2

25,000(1.05^)-1 + 30,000(1.05)^-2

25,000(0.952381) + 30,000(0.907029)

23,809.525 + 27,210.87

=$51,020.40

Thus, the present value of the cash flows is $51,020.40