Exercise 11-2 Net Present Value Method Lo11-2] of Kunkel Company is considering

Question

Exercise 11-2 Net Present Value Method Lo11-2] 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 12%. to view Exhibit 11B-1 and Exhibit 11B-2 to determine the appropriate discount factorie) using tables Required: 1. Determine the nét present value of the investment in the machine. et present value out life of the machine? (Any cash outflows should be indicatod by a minus sign.) 2. What is the difference tflows over the entire Item Cash Flow Annual cost savings $ 25,000 Initial inv

Explanation / Answer

Ans)

1) Calculation of NPV

NPV = Present vaue of cash inflows - present value of cash outflows

= 6000 X PVAF (12%, 5 years) - 25000

= 6000 X 3.605 - 25000

= 21630 - 25000

= (3370)

2) Item Cash flow Years Total cash flows

Annual cost savings 6000 5 30,000

Initial investment (25000) 1 (25000)

Net cash flow 5,000

Related Questions

Navigate

• Browse (All)
• Browse E
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.