Exercise 13-2 Net Present Value Analysis [LO13-2] The management of Kunkel Compa

Question

Exercise 13-2 Net Present Value Analysis [LO13-2]

The management of Kunkel Company is considering the purchase of a $33,000 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 salvage value. The company’s required rate of return is 16%.

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.

2. What is the difference between the total, undiscounted cash inflows and cash outflows over the entire life of the machine?

Explanation / Answer

Now 1 2 3 4 5 Purchase of machine -33000 Reduced operating costs 8500 8500 8500 8500 8500 Total cash flows -33000 8500 8500 8500 8500 8500 Discount factor (11%) 1 0.862 0.743 0.641 0.552 0.476 Present value -33000 7327 6316 5449 4692 4046 Net present value -5171 2 Cash Flow Years Total Cash Flows Annual cost savings 8500 5 42500 Initial investment -33000 1 -33000 Net cash flow 9500

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