The management of Kunkel Company is considering the purchase of a $31,000 machin
ID: 2484457 • Letter: T
Question
The management of Kunkel Company is considering the purchase of a $31,000 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 13%.
Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using table.
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).)
The management of Kunkel Company is considering the purchase of a $31,000 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 13%.
Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using table.
Explanation / Answer
Q1 Statement showing computations Particulars Now 1.00 2.00 3.00 4.00 5.00 Purchase of Machine (31,000.00) Reduced Operating Costs 8,500.00 8,500.00 8,500.00 8,500.00 8,500.00 Total Cash Flows (31,000.00) 8,500.00 8,500.00 8,500.00 8,500.00 8,500.00 Discount Factor(13%) 1.00 0.8850 0.7831 0.6931 0.6133 0.5428 Present Value (31,000.00) 7,522.12 6,656.75 5,890.93 5,213.21 4,613.46 Net present Value (1,103.53) Q2 Item Cash Flow Years Total Cash Flows Annual cost savings 8,500.00 5.00 42,500.00 Initial Investment 31,000.00 31,000.00 Net Cash Flow 11,500.00
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