nagement of Kunkel Company is considering the purchase of a $22,000 machine that

Question

nagement of Kunkel Company is considering the purchase of a $22,000 machine that would reduoe operating costs by $5,000 per year. At the end of the machine's five-year useful life, it will have zero value. The company's required rate of return is 16%. scrap Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factorfs) 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 outfows 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 Hints References eBook & Resources MacBook Ai F1 F2

Explanation / Answer

Now 1 2 3 4 5 Purchase of machine -22000 Reduced operating costs 5000 5000 5000 5000 5000 Total cash flows -22000 5000 5000 5000 5000 5000 Discount factor (16%) 1 0.862 0.743 0.641 0.552 0.476 Present value -22000 4310 3715 3205 2760 2380 Net present value -5630 2 Cash Flow Years Total CashFlows Annual cost savings 5000 5 25000 Initial investment -22000 1 -22000 Net cash flow 3000

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