Use the following information to answer the next four questions:
A clothing manufacturing firm is deciding whether to invest in a new technology that needs an initial investment of $45,000.This will increase cash flows in the first year by $25,000 and $30,000 in the second year.The firm's current fixed costs are $9,000 and marginal cost is $15.The firm currently charges $18 per unit.
-If the interest rate is 5% then the net present value of these cash flows is
A)$6,020.41
B)$7,380.95
C)-$7,380.95
D)$10,000

Question

Quizplus · Accepted Answer

To calculate the net present value, we need to discount the cash flows using the interest rate. 
NPV = -Initial Investment + Present Value of Cash Flows 
NPV = -45000 + (25000/1.05) + (30000/1.05^2) 
NPV = -45000 + 23809.52 + 25601.89 
NPV = 44011.41 - 45000 
NPV = -$988.59 
Since the net present value is negative, the best choice is not to invest in the new technology.

Use the Following Information to Answer the Next Four Questions