| eztomheducation.com/hm.tpx Exercise 11-2 Net Present Value Method [L011-2] of
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| eztomheducation.com/hm.tpx Exercise 11-2 Net Present Value Method [L011-2] of Kunkel Company is considering the purchase of a $27,000 machine that would reduce The management 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 I life, it tables. 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.) Total Cash Flows Item Cash Flow Years Annual cost savings Initial investment Net cash flowExplanation / Answer
Exercise 11-2 Answer 1 Calculation of net present value of investment in the machine Year 0 1 2 3 4 5 NPV Cost of machine -$27,000 Saving in operating cost $7,000 $7,000 $7,000 $7,000 $7,000 Net Cash flow -$27,000 $7,000 $7,000 $7,000 $7,000 $7,000 Discount factor @ 12% 1 0.89285714 0.7971939 0.71178 0.635518 0.567427 Present Value -$27,000.00 $6,250.00 $5,580.36 $4,982.46 $4,448.63 $3,971.99 -$1,766.57 Net present value of investment in the machine = -$1,766.57 Answer 2 Difference between total undiscounted cash inflows and cash outflows over the entire life of the machine Item Cash flow Years Total Cash flows Annual cost savings $7,000 5 $35,000 Initial Investment -$27,000 0 -$27,000 Net Cash flow $8,000 Exercise 11-4 Simple rate of return = Incremental net Income / Initial Net Investment in machine Incremental net income = Cost saving - depreciation = $18000 - $12000 = $6000 Initial net investment in machine = Purchase cost - scrap value of old machine = $120000 - $40000 = $80000 Simple rate of return = $6000 / $80000 = 7.50% Exercise 11-1 Answer 1 Calculation payback period Year Net Cash flow Cumulative cash flow 1 -$14,000 -$14,000 2 -$6,000 -$20,000 3 $2,500 -$17,500 4 $4,000 -$13,500 5 $5,000 -$8,500 6 $6,000 -$2,500 7 $5,000 $2,500 8 $4,000 $6,500 9 $3,000 $9,500 10 $2,000 $11,500 Payback period = 6 years + ($2500/$5000) = 6.5 years Answer 2 No , the pay back period won't be affected if the cash inflow in the last year were several times as large. This is because as pay back period method doesn't take into account the cash flows beyond pay back period.
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