The management of Kunkel Company is considering the purchase of a $25,000 machin
ID: 2488410 • Letter: T
Question
The management of Kunkel Company is considering the purchase of a $25,000 machine that would reduce operating costs by $6,000 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 12%. Click here to view Exhibit 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables. 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).)
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.)
Now 1 2 3 4 5 Purchase of machine Reduced operating costs 6,000 6,000 6,000 6,000 6,000 Total cash flows 0 6000 6000 6000 6000 6000 Discount factor (12%) 1 Present value 0 0 0 0 0 0 Net present value 0Explanation / Answer
year cash flow present value @12% present value of cash flow 0 -25000 1 6000 0.892857 5357.143 2 6000 0.797194 4783.163 3 6000 0.71178 4270.681 4 6000 0.635518 3813.108 5 6000 0.567427 3404.561 present value of cash flow 21628.66 cash flow 25000 NPV -3371.34 answer no 2 undiscounted cash flow 30000 cash outflow 25000 profit 5000
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