The management of Kunkel Company is considering the purchase of a $20,000 machin

ID: 2532760 • Letter: T

Question

The management of Kunkel Company is considering the purchase of a $20,000 machine that would reduce erating costs by $5,000 per year. At the end of the machine's five-year useful life, it will have zero scra value. The company's required rate of return is 13%. 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. Net present value 2. 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.) Total Cash Flows Item Cash Flow Years Annual cost savings Initial investment Net cash flow

Explanation / Answer

1.Net Present Value = -$2,413 (Negative)

Net Present Value = Present Value of Inflows – Investment

= $5,000 x (PVAF 13%, 5 Years) - $20,000

= ($5000 x 3.51723) - $20,000

= $17,586 - $20,000

= -$2,413 (Negative)

2. What is the difference between the total, undiscounted cash inflows and cash outflows over the entire life of the machine?

Cash Flow

Years

Total cash flow

Annual cost savings

$5,000

$25,000

Initial investment

($20,000)

($20000)

Net cash flow

$5000