2. The management of Kunkel Company is considering the purchase of a $38,000 mac

Question

2. The management of Kunkel Company is considering the purchase of a $38,000 machine that would reduce operating costs by $8,500 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 11%. Click here to view Exhibit 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables. 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.) Cash Flow Total YearsCash Flows Item Annual cost savings Initial investment Net cash flow

Explanation / Answer

Now 1 2 3 4 5 Purchase of machine -38000 Reduced operating costs 8500 8500 8500 8500 8500 Total cash flows -38000 8500 8500 8500 8500 8500 Discount factor (12%) 1 0.901 0.812 0.731 0.659 0.593 Present value -38000 7659 6902 6214 5602 5041 Net present value -6584 2 Cash Flow Years Total CashFlows Annual cost savings 8500 5 42500 Initial investment -38000 1 -38000 Net cash flow 4500

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