The management of Kunkel Company is considering the purchase of a $31,000 machin

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%.

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. Required: 1. Determine the net present value of the investment in the machine. 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

Explanation / Answer

Now 1 2 3 4 5 Purchase of machine -31000 Reduced operating costs 8500 8500 8500 8500 8500 Total cash flows -31000 8500 8500 8500 8500 8500 Discount factor (13%) 1 0.885 0.783 0.693 0.613 0.543 Present value -31000 7523 6656 5891 5211 4616 Net present value -1106 2 Cash Flow Years Total Cash Flows Annual cost savings 8500 5 42500 Initial investment -31000 1 -31000 Net cash flow 11500

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