The management of Kunkel Company is considering the purchase of a $37,000 machin
ID: 2598602 • 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.
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.)
1. The following cost data pertain to the operations of Rademaker Department Stores, Inc., for the month of March.
The Northridge Store is just one of many stores owned and operated by the company. The Cosmetics Department is one of many departments at the Northridge Store. The central warehouse serves all of the company's stores.
$95,540
$40,360
$34,500
$44,850
2.
Erkkila Inc. reports that at an activity level of 7,100 machine-hours in a month, its total variable inspection cost is $424,730 and its total fixed inspection cost is $183,446.
What would be the average fixed inspection cost per activity unit at an activity level of 7,400 machine-hours in a month? Assume that this level of activity is within the relevant range.
$24.79
$85.66
$25.84
$33.98
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
Answer 1-1. Net Present Value Calculation of NPV of Project Particulars Year 12% Factor Amount Present value D C C X D Cash Inflow Savings in Operating Costs 1-5 3.60478 8,000 28,838 A. Total Cash Inflow - PV 28,838 Cash Outflow Cost of Amusement Park 0 1.000 37,000 37,000 B. Total Cash Outflow - PV 37,000 NPV (A - B) (8,162) Answer 1-2. Total Undiscounted Cash Inflows = $8,000 X 5 Years = $40,000 Total Undiscounted Cash Outflows = $37,000 Items Cash Flow Years Total Cash Flows Annual Cost Savings 8,000 1-5 40,000 Intial Investment 37,000 0 37,000 Net Cash Flow 3,000 Answer 2-D. $44,850 Direct Costs of Cosmetics Department: Cosmetics Department sales commissions--Northridge Store 5,860 Cosmetics Department cost of sales--Northridge Store 34,500 Cosmetics Department manager's salary--Northridge Store 4,490 Total Direct Costs 44,850 Answer 3-A. $24.79 Average Fixed Inspection Cost per activity = $183,446 / 7,400 Mach Hrs Average Fixed Inspection Cost per activity = $24.79 per mach hr
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