| The management of Kunkel Company is considering the purchase of a $25,000 machine that would reduce operating costs by $6,000 per year. At the end of the machine’s five-year useful life, it will have zero scrap value. The company’s required rate of return is 11%. |
| Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using table. |
the management of kunkel company is considering the purchase of a
| Required: | |
| 1. | Determine the net present value of the investment in the machine. |
| 2. | What is the difference between the total, undiscounted cash inflows and cash outflows over the entire life of the machine? (Any cash outflows should be indicated by a minus sign.) |
| 1) | Net present value of machine | ||||||
| investment | -25000 | ||||||
| Saving in operating costs: | |||||||
| (6,000*3.69590) | 22175 | ||||||
| Net present value of machine | -2825 | ||||||
| ( the 3.69590 is the present value of ordinary annuity at 11% for | |||||||
| Five years) | |||||||
| (the discount factor used is upto five decimal point, in case in your question | |||||||
| it is rounded please use that for exact answer) | |||||||
| 2) | undiscounted cash flow | ||||||
| investment | -25000 | ||||||
| Saving in operating costs: | |||||||
| (6000*5) | 30,000 | ||||||
| Net present value | 5000 | ||||||
the management of kunkel company is considering the purchase of a
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