The management of Kunkel Company is considering the purchase of a $32,000 machin
ID: 2475981 • Letter: T
Question
The management of Kunkel Company is considering the purchase of a $32,000 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 13%.
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).)
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.)
The management of Ballard MicroBrew is considering the purchase of an automated bottling machine for $43,000. The machine would replace an old piece of equipment that costs $11,000 per year to operate. The new machine would cost $5,000 per year to operate. The old machine currently in use could be sold now for a scrap value of $18,000. The new machine would have a useful life of 10 years with no salvage value.
Compute the simple rate of return on the new automated bottling machine.
Simple Rate of Return
annual incremental net operating income
or
Initial Investment
annual incremental net operating income
or
Initial Investment
Now 1 2 3 4 5 Purchase of Machine Reduced Operating Cost Total cash flows Discount factor (13%) Present Value Net Present ValueExplanation / Answer
Solution:
1) Calculation of Net Present Value of the investment in the machine
Now
1
2
3
4
5
Purchase of Machine
- $32,000
Reduced Operating Cost
$8,000
$8,000
$8,000
$8,000
$8,000
Total cash flows
- $32,000
$8,000
$8,000
$8,000
$8,000
$8,000
Discount factor (13%)
$1
$1
$1
$1
$1
$1
Present Value
- $32,000
$7,080
$6,264
$5,544
$4,904
$4,344
Net Present Value
- $3,864
2) The difference between the total, undiscounted cash inflows and cash outflows over the entire life of the machine
item
Cash Flow
Years
Total Cash Flow
Annual Cost savings
$8,000
5
$40,000
Initial Investment
$32,000
$32,000
Net cash flows
$8,000
Please ask separate question for next ----
Now
1
2
3
4
5
Purchase of Machine
- $32,000
Reduced Operating Cost
$8,000
$8,000
$8,000
$8,000
$8,000
Total cash flows
- $32,000
$8,000
$8,000
$8,000
$8,000
$8,000
Discount factor (13%)
$1
$1
$1
$1
$1
$1
Present Value
- $32,000
$7,080
$6,264
$5,544
$4,904
$4,344
Net Present Value
- $3,864
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