The management of Kunkel Company is considering the purchase of a $37,000 machin
ID: 2594066 • Letter: T
Question
The management of Kunkel Company is considering the purchase of a $37,000 machine that would reduce operating costs by $8,000 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 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables.
Exhibit 11B-1 Link: http://lectures.mhhe.com/connect/0078025419/Exhibit/Exhibit%2011B-1.JPG
Exhibit 11B-2 Link: http://lectures.mhhe.com/connect/0078025419/Exhibit/Exhibit%2011B-2.JPG
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.)
Item Cash Flow Years Total Cash Flows
Annual Cost Savings
Initial Investment
Net cash flow
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The management of Kunkel Company is considering the purchase of a $37,000 machine that would reduce operating costs by $8,000 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%.
Explanation / Answer
Now 1 2 3 4 5 Purchase of machine -37000 Reduced operating costs 8000 8000 8000 8000 8000 Total cash flows -37000 8000 8000 8000 8000 8000 Discount factor (12%) 1 0.893 0.797 0.712 0.636 0.567 Present value -37000 7144 6376 5696 5088 4536 Net present value -8160 2 Cash flows Years Total CashFlows Annual cost savings 8000 5 40000 Initial investment -37000 1 -37000 Net cash flow 3000
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