The management of Kunkel Company is considering the purchase of a $33,000 machin
ID: 2476830 • Letter: T
Question
The management of Kunkel Company is considering the purchase of a $33,000 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 16%.
Click here -http://lectures.mhhe.com/connect/0078025419/Exhibit/Exhibit%2011B-1.JPG to view Exhibit 11B-1 and- http://lectures.mhhe.com/connect/0078025419/Exhibit/Exhibit%2011B-2.JPG 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 $33,000 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 16%.
Click here -http://lectures.mhhe.com/connect/0078025419/Exhibit/Exhibit%2011B-1.JPG to view Exhibit 11B-1 and- http://lectures.mhhe.com/connect/0078025419/Exhibit/Exhibit%2011B-2.JPG Exhibit 11B-2, to determine the appropriate discount factor(s) using tables.
Required: 1.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).)
Now 1 2 3 4 5 Purchase of machine reduced operating costs total cash flow Discount factor (16%) Present value net present value 2.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 cash flowExplanation / Answer
Answer 1 Determination of net present value of the investment in machine Now 1 2 3 4 5 Purchase of machine -$33,000 Reduced operating cost $8,500 $8,500 $8,500 $8,500 $8,500 Total cash flow -$33,000 $8,500 $8,500 $8,500 $8,500 $8,500 Discount factor @ 16% 1 0.862068966 0.743162901 0.640658 0.552291 0.476113 Present value -$33,000 $7,328 $6,317 $5,446 $4,694 $4,047 Net present value -$5,169 Answer 2 Difference between total undiscounted cash inflows and cash outflows Item Cash flow Years Total cash flows Annual cost savings $8,500 5 $42,500 Initial investment -$33,000 1 -$32,999 Net cash flow $9,501
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