The management of Kunkel Company is considering the purchase of a $27,000 machin
ID: 2528729 • Letter: T
Question
The management of Kunkel Company is considering the purchase of a $27,000 machine that would reduce operating costs by $7,000 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 12%.
Click here to view Exhibit 13B-1 and Exhibit 13B-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?The management of Kunkel Company is considering the purchase of a $27,000 machine that would reduce operating costs by $7,000 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 12%.
Click here to view Exhibit 13B-1 and Exhibit 13B-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?
https://ezto-cf-media.mheducation.com/Media/Connect_Production/bne/accounting/Garrison_16e/exhibit_13B_1.jpg
https://ezto-cf-media.mheducation.com/Media/Connect_Production/bne/accounting/Garrison_16e/exhibit_13B_2.jpg
Explanation / Answer
It is assumed that both requirements are same.
Answer for 1)
Computation ofpresent value of the investment per year
0.893
[1/1.12)
0.797
(1/(1.12)^2)
0.712
(1/(1.12)^3)
0.636
(1/(1.12)^4)
0.567
(1/(1.12)^5)
Net present value:
$(6251+5579+4989+4452+3969)-$27000
=($1765)
Answer for 2)
Differences between total undiscounted cash inflows and cash outflows over entire life of assets:
[$7000×5years]-$27000
=$8000
Particulars year0($) year1($) year2($) year3($) year4($) year5($) Initial investment (27000) Reduced operating costs 7000 7000 7000 7000 7000 Discount factor0.893
[1/1.12)
0.797
(1/(1.12)^2)
0.712
(1/(1.12)^3)
0.636
(1/(1.12)^4)
0.567
(1/(1.12)^5)
Present value (27000) 6251 5579 4984 4452 3969Related Questions
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