The management of Kunkel Company is considering the purchase of a $30,000 machin
ID: 2533825 • 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.)
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 1 0.893 0.797 0.712 0.636 0.567 Present value -30000 5805 5181 4628 4134 3686 Net present value -6568 or -6567 2 Cash flow Years Total CashFlows Annual cost savings 6500 5 32500 Initial investment -30000 1 -30000 Net cash flow 2500
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