The management of Kunkel Company is considering the purchase of a $31,000 machin

Question

The management of Kunkel Company is considering the purchase of a $31,000 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 salvage value. The company's required rate of return is 13% Click here to view Exhibit 13B-1 and Exhibit 138-2, to determine the appropriate discount factor(s) using table. Required 1. Determine the net present value of the investment in the machine 2. What is the difference between the total, undiscounted cash inflows and cash outflows over the entire life of the machine?

Explanation / Answer

1 Year Cash flow PVF @ 14% Dicounted cash flow 0              -31,000                       1.000              -31,000 1-6                  8,500                       3.517                29,895 NPV                -1,106 2 Undiscounted cash flow means cashflow without considering time value of money Dicounted cash will be after considering time value of money What u receiving today will not equal what u receiving tommorow so that time value of money concept we are using

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