The management of Kunkel Company is considering the purchase of a $44,000 machin
ID: 2568699 • Letter: T
Question
The management of Kunkel Company is considering the purchase of a $44,000 machine that would reduce operating costs by $10,000 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 11%.
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?
Complete this question by entering your answers in the tabs below.
Required 1
Determine the net present value of the investment in the machine. (Negative amounts should be indicated by a minus sign. Use the appropriate table to determine the discount factor(s).)
Required 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.)
Explanation / Answer
a) Calculate net present value :
Net present value = Present value of cash inflow-Present value of cash outflow
= (10000*3.69590)-44000
Net present value = -7041
b) What is the difference between the total, undiscounted cash inflows and cash outflows over the entire life of the machine
Difference = Total of Undiscounted cash inflow-Total of cash outflow
= (10000*5)-44000
Difference = 6000
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