Exercise 11-2 Net Present Value Method [LO11-2] The management of Kunkel Company
ID: 2528473 • Letter: E
Question
Exercise 11-2 Net Present Value Method [LO11-2]
The management of Kunkel Company is considering the purchase of a $25,000 machine that would reduce operating costs by $6,000 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 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.
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 $25,000 machine that would reduce operating costs by $6,000 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 11%.
Explanation / Answer
Statement showing Cash flows Particulars Time PVf 11% Amount PV Cash Outflows - 1.00 (25,000.00) (25,000.00) PV of Cash outflows = PVCO (25,000.00) Cash inflows 1.00 0.9009 6,000.00 5,405.41 Cash inflows 2.00 0.8116 6,000.00 4,869.73 Cash inflows 3.00 0.7312 6,000.00 4,387.15 Cash inflows 4.00 0.6587 6,000.00 3,952.39 Cash inflows 5.00 0.5935 6,000.00 3,560.71 PV of Cash Inflows =PVCI 22,175.38 NPV= PVCI - PVCO (2,824.62) 2) Value of total, undiscounted cash inflows 30,000.00 cash outflows (25,000.00) Difference 5,000.00
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