The management of Kunkel Company is considering the purchase of a $36,000 machin

Question

The management of Kunkel Company is considering the purchase of a $36,000 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 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. Net present value (6,104) 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.) Total Cash Flows Item Cash Flow Years Annual cost savings Initial investment Net cash flow

Explanation / Answer

Computation of Net present value

Year Cash flows Discount rate 13% PV of cash flows

1 to 5 $8500 3.5172 (PV of annuity) $29896.2

Initial investment ($36000)

NPV ($6103.8)

Item Cash flow Years Total cash flows

Annual cost savings $8500 5 $42500

Initial investment $36000 1 ($36000)

Net cash flow $6500.

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