HWB (Ch 11) Question 6 (of tt) 6 value 2.00 points Exercise 11-2 Net Present Val

Question

HWB (Ch 11) Question 6 (of tt) 6 value 2.00 points Exercise 11-2 Net Present Value Method L011-2] 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 12%. 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. present value 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.) Item Cash Flow Years Flows Annual cost savings Initial investment Net cash flow Hints References eBook & Resources 0 Type here to search

Explanation / Answer

Solution 1:

Initial investment = $25,000

Annual cash inflow by reduction in operating cost = $6,000

Present value of annual cash inflows = $6,000 * cumulative PV factor at 12% for 5 periods

= $6,000 * 3.604776 = $21,629

Net present value = Present value of cash inflows - Initial investment = $21,629 - $25,000 = ($3,371)

Solution 2:

Item Cash Flow Years Total Cash flows Annual cost savings $6,000.00 5 $30,000.00 Initial investment -$25,000.00 1 -$25,000.00 Net Cash flow $5,000.00

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