The management of Kunkel Company is considering the purchase of a $27,000 machin

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? Complete this question by entering your answers in the tabs below Required 1 Required 2 Determine the net present value of the investment in the machine. (Negative amounts should be indicated by a minus sign. Round your final answer to the nearest whole dollar amount. Use the appropriate table to determine the discount factor(s).) Net present value

Explanation / Answer

1 Now 1 2 3 4 5 Purchase of machine -27000 Reduced operating costs 7000 7000 7000 7000 7000 Total cash flows -27000 7000 7000 7000 7000 7000 Discount factor (12%) 1 0.893 0.797 0.712 0.636 0.567 Present value -27000 6251 5579 4984 4452 3969 Net present value -1765 2 Cash Flow Years Total CashFlows Annual cost savings 7000 5 35000 Initial investment -27000 1 -27000 Net cash flow 8000

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