The management of Kunkel Company is considering the purchase of a $34,000 machin
ID: 2330425 • Letter: T
Question
The management of Kunkel Company is considering the purchase of a $34,000 machine that would reduce operating costs by $9,000 per year. At the end of the machine’s five-year useful life, it will have zero salvage value. The company’s required rate of return is 12%.
Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using table.
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?
Explanation / Answer
Question 1;
Net present value of the investment = - $1555
Explanation;
Year
Cash flows
Discounting factor @ 12%
Present Value
0
- $34000
1
- $34000
1
$9000
0.893
$8037
2
$9000
0.797
$7173
3
$9000
0.712
$6408
4
$9000
0.636
$5724
5
$9000
0.567
$5103
Net Present Value
- $1555
Question 2;
The difference between the total, undiscounted cash inflows and cash outflows over the entire life of the machine = $11000
Explanation;
Item
Cash Flow
Years
Total cash flows
Annual cost savings
$9000
5
$45000
Initial investment
- $34000
1
- $34000
Net cash flow (Difference)
$11000
Year
Cash flows
Discounting factor @ 12%
Present Value
0
- $34000
1
- $34000
1
$9000
0.893
$8037
2
$9000
0.797
$7173
3
$9000
0.712
$6408
4
$9000
0.636
$5724
5
$9000
0.567
$5103
Net Present Value
- $1555
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