The management of Kunkel Company is conceding the purchase of a $23,000 machine

Question

The management of Kunkel Company is conceding the purchase of a $23,000 machine that would reduce operating costs by $5,000 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 to determine the appropriate discount factors) using tables Required: 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).) 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.)

Explanation / Answer

Net Present value of the project = -4976

2)

Particulars Year Cash Flows PVF @ 12% PV @ 12% Initial Investment 0 -23000 1 -23000 Cash Inflow net of tax 1 5000               0.89           4,464 Cash Inflow net of tax 2 5000               0.80           3,986 Cash Inflow net of tax 3 5000               0.71           3,559 Cash Inflow net of tax 4 5000               0.64           3,178 Cash Inflow net of tax 5 5000               0.57           2,837 Net Present Value         -4,976

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