Exercise 13-2 Net Present Value Method [LO13-2] The management of Kunkel Company
ID: 2488036 • Letter: E
Question
Exercise 13-2 Net Present Value Method [LO13-2]
The management of Kunkel Company is considering the purchase of a $27,000 machine that would reduce operating costs by $6,500 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).)
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 Kunkel Company is considering the purchase of a $27,000 machine that would reduce operating costs by $6,500 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
Answer 1
Answer 2
NOW 1 2 3 4 5 Purchase of machine -27000 Reduced Operating cost 6500 6500 6500 6500 6500 Net cash Flows -27000 6500 6500 6500 6500 6500 Discounting factor @ 13% 1 0.885 0.783 0.693 0.613 0.543 Present Values -27000 5753 5090 4505 3985 3530 NPV -$4137Related Questions
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