The management of Kunkel Company is considering the purchase of a $21,000 machin
ID: 2587488 • Letter: T
Question
The management of Kunkel Company is considering the purchase of a $21,000 machine that would reduce operating costs by $5,000 per year. At the end of the machine’s five-year useful life, it will have zero salvage 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.
2. What is the difference between the total, undiscounted cash inflows and cash outflows over the entire life of the machine?
Explanation / Answer
Now 1 2 3 4 5 Purchase of machine -21000 Reduced operating costs 5000 5000 5000 5000 5000 Total cash flows -21000 5000 5000 5000 5000 5000 Discount factor (12%) 1 0.893 0.797 0.712 0.636 0.567 Present value -21000 4465 3985 3560 3180 2835 Net present value -2975 2 Cash Flow years Total Cash Flow Annual cost savings 500 5 25000 Initial investment -21000 1 -21000 Net cash flow 4000
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