4. The management of Kunkel Company is considering the purchase of a $38,000 mac

Question

4.The management of Kunkel Company is considering the purchase of a $38,000 machine that

would reduce operating costs by $8,500 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 11%.

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. (Any cash outflows should

be indicated by a minus sign. Use the appropriate table to determine the discount

factor(s).)

Now

1

2

3

4

5

Purchase of machine

Reduced operating costs

Total Cash Flows

Discount factor(11%)

Present Value

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

4.The management of Kunkel Company is considering the purchase of a $38,000 machine that

would reduce operating costs by $8,500 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 11%.

Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s)

using table.

Explanation / Answer

Particulars 0                       1                 2                 3                 4                 5 Total Purchase of machine        -38,000        -38,000 Reduced operating costs                   -                 8,500         8,500         8,500         8,500         8,500          42,500 Total Cash Flows        -38,000               8,500         8,500         8,500         8,500         8,500            4,500 Discount factor(11%)                     1                       1                 1                 1                 1                 1 Present Value        -38,000               7,658         6,899         6,215         5,599         5,044 Net Present value        -38,000               7,658         6,899         6,215         5,599         5,044           -6,585 Item Cash flow years Total cash flows Annual cost savings            8,500                       5       42,500 Initial Investment        -38,000                       1     -38,000 Net cash flow         4,500

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