The management of Kunkel Company is considering the purchase of a $43,000 machin

Question

The management of Kunkel Company is considering the purchase of a $43,000 machine that would reduce operating costs by $9,000 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%. 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 = Present value of cash inflow-Present value of cash outflow

= (9000*3.605)-43000

Net present value = -10555

2) Difference in cash flow :

Item Cash flow Years Total cash flows Annual cash saving 9000 5 45000 Initial investment -43000 1 -43000 Net cash flow 2000

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