The management of Opry Company, a wholesale distributor of suntan products, is c
ID: 2480460 • Letter: T
Question
The management of Opry Company, a wholesale distributor of suntan products, is considering the purchase of a $26,000 machine that would reduce operating costs in its warehouse by $4,500 per year. At the end of the machine’s 8-year useful life, it will have no scrap value. The company’s required rate of return is 11%. (Ignore income taxes.)
Click here to view Exhibit 11B-2, to determine the appropriate discount factor(s) using table.
Determine the net present value of the investment in the machine. (Negative amount should be indicated by a minus sign. Round discount factor(s) to 3 decimal places, other intermediate calculations and final answer to the nearest whole dollar.)
What is the difference between the total, undiscounted cash inflows and cash outflows over the entire life of the machine?
The management of Opry Company, a wholesale distributor of suntan products, is considering the purchase of a $26,000 machine that would reduce operating costs in its warehouse by $4,500 per year. At the end of the machine’s 8-year useful life, it will have no scrap value. The company’s required rate of return is 11%. (Ignore income taxes.)
Click here to view Exhibit 11B-2, to determine the appropriate discount factor(s) using table.
Explanation / Answer
Opry Company, a wholesale distributor Initial cost 26000 Life of the assets (Machine)in Years 8 Decrease in annual operating cost 4500 Salvage Value 0 Required rate of return 11% (a) Item Year Amount of Cash flow 11% Factor P.V of Cash flow Decrease in annual cash 1 to 8 years $4,500 5.1461 $23,157.45 Initial Investent NOV $26,000 1 ($26,000) Net Presen Value ($2,843) (b) Undiscounted cash inflow Warehouse Cost $36,000 Machine cost $26,000 Net Cash Flow $10,000 Warehouse Cost $ 36,000.00
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