The management of Opry Company, a wholesale distributor of suntan products, is c
ID: 2449808 • Letter: T
Question
The management of Opry Company, a wholesale distributor of suntan products, is considering the purchase of a $34,000 machine that would reduce operating costs in its warehouse by $5,600 per year. At the end of the machine’s 10-year useful life, it will have no scrap value. The company’s required rate of return is 12%. (Ignore income taxes.)
Click here to view Exhibit 8B-1 and Exhibit 8B-2, to determine the appropriate discount factor(s) using table.
Required:
1.
Determine the net present value of the investment in the machine. (Any cash outflows should be indicated by a minus sign. Round discount factor(s) to 3 decimal places, intermediate to the nearest dollar amount.)
Item
Years
Cash Flow
12% Factor
Present Value of Cash Flows
Annual Cost Savings
10-Jan
Initial Investment
Now
Net Present Value
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
Total Cash Flows
Annual Cost Savings
Initial Investment
Net Present Value
The management of Opry Company, a wholesale distributor of suntan products, is considering the purchase of a $34,000 machine that would reduce operating costs in its warehouse by $5,600 per year. At the end of the machine’s 10-year useful life, it will have no scrap value. The company’s required rate of return is 12%. (Ignore income taxes.)
Click here to view Exhibit 8B-1 and Exhibit 8B-2, to determine the appropriate discount factor(s) using table.
Explanation / Answer
1.
Annual Cost Savings = $5,600
Initial Investment = $34,000
Life of the machine = 10
Rate of return = 12%
Based on Undiscounted cash inflows, Net present value is as follows:
Annual Cost Savings = $5600
Initial Investment = $34,000
Total undiscounted cash inflows for 10 years = $5,600 X 10 = $56,000
Total Cash Outflow = -$34,000
Net Present value = Total Undiscounted cash inflow - Total Cash Outflow = $56,000 - $34,000 = $22,000
Years Cash inflows($) Discountingfactor 12% Present value of
Cash flows ($) 1 5,600 0.893 5,001 2 5,600 0.797 4,463 3 5,600 0.712 3,987 4 5,600 0.636 3,562 5 5,600 0.567 3,175 6 5,600 0.507 2,839 7 5,600 0.452 2,531 8 5,600 0.404 2,262 9 5,600 0.361 2,022 10 5,600 0.322 1,803 Total Cash inflows 31,646 Less: Outflow -34,000 Net Present Value -2,354
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