The management of Kunkel Company is considering the purchase of a dollar 36,000

Question

The management of Kunkel Company is considering the purchase of a dollar 36,000 machine that would reduce operating costs by dollar 8,500 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 13%. Click here to view Exhibit 13B-1 and Exhibit 13B-2. to determine the appropriate discount factor(s) using table. 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

Answer 1. Now 1 2 3 4 5 Purchase of Machine              (36,000) Reducing Operating Costs          8,500              8,500          8,500          8,500          8,500 Total Cash Flows              (36,000)          8,500              8,500          8,500          8,500          8,500 Discount Factor (13%)                 1.0000       0.8850           0.7831       0.6931       0.6133       0.5428 Present value              (36,000)          7,522              6,657          5,891          5,213          4,613 Net Present Value                 (6,104) Answer 2. Item Cash Flow Years Total Cash Flows Annual Cost Savings                   8,500 1-5           42,500 Intial Investment         (36,000) Net Cash Flow              6,500

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