The management of Kunkel Company is considering the purchase of a $41,000 machin
ID: 2476695 • Letter: T
Question
The management of Kunkel Company is considering the purchase of a $41,000 machine that would reduce operating costs by $9,000 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 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using table.
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 $41,000 machine that would reduce operating costs by $9,000 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 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using table.
Explanation / Answer
1 year 0 year 1 year 2 year 3 yea. year 5 cost of the machine -41000 savings 9000 9000 9000 9000 9000 net cash flows -41000 9000 9000 9000 9000 9000 pv @ 12% 1 0.89286 0.7972 0.71178 0.635518 0.567427 present value -41.004 -41000 8035 7174.7 6406.02 5719.66 5106.84 net present value -8557.01 -8557.01 2 undisounted cash inflows 45000 (9000*5) Less undisounted cash outflows 41000 difference $4,000
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