The management of Kunkel Company is considering the purchase of a $30,000 machin
ID: 2531958 • Letter: T
Question
The management of Kunkel Company is considering the purchase of a $30,000 machine that would reduce operating costs by $6,500 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%.
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.)
3.
The management of Ballard MicroBrew is considering the purchase of an automated bottling machine for $69,000. The machine would replace an old piece of equipment that costs $17,000 per year to operate. The new machine would cost $7,000 per year to operate. The old machine currently in use is fully depreciated and could be sold now for a scrap value of $23,000. The new machine would have a useful life of 10 years with no salvage value.
Compute the simple rate of return on the new automated bottling machine.
The management of Kunkel Company is considering the purchase of a $30,000 machine that would reduce operating costs by $6,500 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%.
Explanation / Answer
Now 1 2 3 4 5 Purchase of machine -30000 Reduced operating costs 6500 6500 6500 6500 6500 Total cash flows -30000 6500 6500 6500 6500 6500 Discount factor (12%) 1 0.893 0.797 0.712 0.636 0.567 Present value -30000 5805 5181 4628 4134 3686 Net present value -6568 Note: Net present value may be + 1 due to rounding off 2 Cash Flow Years Total CashFlows Annual cost savings 6500 5 32500 Initial investment -30000 Net cash flow 2500 3 Net investment = 69000-23000 = 46000 Net incremental income=(17000-7000)-(69000/10)= $3100 Simple rate of return = 3100/46000= 6.74%
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.