ter 11 Homework- xThe ezto.mheducation.com/hm.tpx The management of Kunkel Compa

Question

ter 11 Homework- xThe ezto.mheducation.com/hm.tpx The management of Kunkel Company is considering the purchase of a $27,000 machine that would reduce operating costs by $7,000 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 1296 Click here to view Exhibit 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables Required: 1. Determine the net present value of the investment in the machine. (Any cash outflows should be indicated by a minus sign. Use the appropriate table to determine the discount factor(s). When you enter a factor, use a whole number followed by 3 decimal places, for example: 0.123 or 3.456.) Present Value of Item Investment in machine Reduced operating costs Net present value Year(s) Now 1-5 12% Factor 1000 Cash Flow 2. What is the diference 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.) Total Cash Flows Item Cash Flow Years Annual cost savings Initial investment Net cash flow

Explanation / Answer

1) Item Year (s) Cash flow 12% Factor Present Value of cash flows Investment in Machine Now $       -27,000            1.000 $ -27,000 Reduced Operating costs 1-5 $           7,000            3.605 $ 25,235 Net Present Value $ -1,765 Working: Present Value of annuity of 1 = (1-(1+i)^-n)/i Where, = (1-(1+0.12)^-5)/0.12 i 12% =            3.605 n 5 2) Item Cash flow Year (s) Total cash flows Annual Cost Saving $           7,000 1-5 $ 35,000 Initial Investment $       -27,000 Now $ -27,000 Net Cash flow $ 8,000 In this case, time value of money is ignored.

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