The management of Kunkel Company is considering the purchase of a $38,000 machin
ID: 2475408 • Letter: T
Question
The management of Kunkel Company is considering the purchase of a $38,000 machine that would reduce operating costs by $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 11%.
Click here to view Exhibit 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables.
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.)
The management of Kunkel Company is considering the purchase of a $38,000 machine that would reduce operating costs by $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 11%.
Explanation / Answer
Statement showing Cash flows Particulars Time PVf@11% Amount PV Cash Outflows - 1.00 (38,000.00) (38,000.00) PV of Cash outflows = PVCO (38,000.00) Cash inflows 1.00 0.9009 8,500.00 7,657.66 Cash inflows 2.00 0.8116 8,500.00 6,898.79 Cash inflows 3.00 0.7312 8,500.00 6,215.13 Cash inflows 4.00 0.6587 8,500.00 5,599.21 Cash inflows 5.00 0.5935 8,500.00 5,044.34 PV of Cash Inflows =PVCI 31,415.12 NPV= PVCI - PVCO (6,584.88) Total undiscounted Cash flows= 8500 *5 42,500.00 Cash outflows 38,000.00 Difference =42,500 -38,000 4,500.00
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