value: 4.00 points The management of Opry Company, a wholesale distributor of su
ID: 2398680 • Letter: V
Question
value: 4.00 points The management of Opry Company, a wholesale distributor of suntan products, is considering the purchase of a $32,000 machine that would reduce operating costs in its warehouse by S6,500 per year. At the end of the machine's 7-year useful life, it will have no scrap value. The company's required rate of return is 12%. (Ignore income taxes.) Click here to view Exhibit 11B-2, to determine the appropriate discount factor(s) using table. Required: 1. Determine the net present value of the investment in the machine. (Negative amount should be indicated by a minus sign. Round discount factor(s) to 3 decimal places, other intermediate calculations and final answer to the nearest whole dollar.) Net present value 2. What is the difference between the total, undiscounted cash inflows and cash outflows over the entire life of the machine? Net cash flowExplanation / Answer
Calculation of Net Present value
Year
Cash Inflow (Outflows)
Discounting factor at 12% discounting rate
Discounted Cash Flow
0
$ -32,000
1.000
$ (32,000)
1
$ 6,500
0.893
$ 5,804
2
$ 6,500
0.797
$ 5,182
3
$ 6,500
0.712
$ 4,627
4
$ 6,500
0.636
$ 4,131
5
$ 6,500
0.567
$ 3,688
6
$ 6,500
0.507
$ 3,293
7
$ 6,500
0.452
$ 2,940
Net Present Value
$ -2,336
Answer 1
Net Present value
$-2,336
Answer 2
Undiscounted cash inflows
$ 45,500
Initial Cash Outflow
$ 32,000
Difference
$ 13,500
Notes
1. Outflow of $ 32000 will not be discounted as this payment was done at the beginning. Time value of money is calculated only when payment or income relates to future.
2. The NPV of Investment is negative. It is advisable to not purchase machine.
3. Undiscounted cash flow is a positive figure but decision for purchase will be taken on the basis of discounted cash flows only.
Calculation of Net Present value
Year
Cash Inflow (Outflows)
Discounting factor at 12% discounting rate
Discounted Cash Flow
0
$ -32,000
1.000
$ (32,000)
1
$ 6,500
0.893
$ 5,804
2
$ 6,500
0.797
$ 5,182
3
$ 6,500
0.712
$ 4,627
4
$ 6,500
0.636
$ 4,131
5
$ 6,500
0.567
$ 3,688
6
$ 6,500
0.507
$ 3,293
7
$ 6,500
0.452
$ 2,940
Net Present Value
$ -2,336
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