Exercise 11-1 Net Present Value Method [LO1] The management of Opry Company, a w

Question

Exercise 11-1 Net Present Value Method [LO1]

The management of Opry Company, a wholesale distributor of suntan products, is considering the purchase of a $25,000 machine that would reduce operating costs in its warehouse by $4,000 per year. At the end of the machine’s 10-year useful life, it will have no scrap value. The company’s required rate of return is 12%. (Ignore income taxes.)

  
Click here to view Exhibit 11B-2, to determine the appropriate discount factor(s) using table.

Required:

1.

Determine the net present value of the investment in the machine.(Negative amount should be indicated by a minus sign. Round discount factor(s) to 3 decimal places, other intermediate calculations and final answer to the nearest whole dollar.)

  Net present value $   

2.

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

  Net cash flow $   

Explanation / Answer

1 Years(s) Cash flows PV factor Present Value of Cash Flows Annual cost savings 1-10 4000 5.65 22600 Initial investment Now -25000 1 -25000 Net present value -2400 2 Cash flows Year(s) Total Cash Flows Annual cost savings 4000 10 40000 Initial investment -25000 1 -25000    Net cash flow 15000

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