The management of Kunkel Company is considering the purchase of a $35,000 machin

Question

The management of Kunkel Company is considering the purchase of a $35,000 machine that would reduce operating costs by $8,50o 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 16%. 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? Complete this question by entering your answers in the tabs below Required 1Required 2 Determine the net present value of the investment in the machine. (Negative amounts should be indicated by a minus sign. Round your final answer to the nearest whole dollar amount. Use the appropriate table to determine the discount factor(s).) Net present value

Explanation / Answer

Required 1
Net present value - ($7,170)

Explanation:-
                          Now          1          2         3            4             5
Purchase of
    machine      ($35,000)
Reduced-
Operating cost             8,500    8,500    8,500    8,500 8,500
Total cash-
     Flow        ($35,000) 8,500   8,500    8,500    8,500   8,500
Discontinued
Factor(16%) 1.0            0.862    0.743    0.641   0.552 0.476
Present
value        (35,000)         7,327     6,316   5,449   4,692 4046
Net present
Value             (7,170)

Required 2
Item                   cash flow         years          total cash flow
Annual cost
Saving               $8,500                 5                 $42,500
Initial
Investments    ($35,000)             1                 ($35,000)
Net cash flow                                                    $7,500




Required 1
Net present value project A- ($98,722)

Explanation:-
Items                years       amount of       15%     present
                                          Cash inflows   factor   value of
                                                                                 Cash flows
Project A:
Cost of-
equipment         now         ($220,000)     1.0        ($220,000)
Annual cash-
inflow                  1-6          31,000           3.784       117,304
Salvage value
Of equipment        6           9,200             0.432        3,974
Net present value                                                   ($98,722)

Required 2
Net present value project B - $75,592

Explanation:-
Items                years       amount of       15%     present
                                          Cash inflows   factor   value of
                                                                                 Cash flows
Project B:
Working capital
investment       now         ($220,000)     1.0        ($220,000)
Annual cash-
inflow                  1-6          53,000           3.784       200,552
Working capital
Released               6           $220,000       0.432        95,040
Net present value                                                   $75,592

Requirement 3
The $220,000 should be invested in project B rather than in project A. Project B has a positive net present value where project A has negative net present value.

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