710025899 1440155113292 op Ten 3 piece 9.00 points The management of Kunkel Comp

Question

710025899 1440155113292 op Ten 3 piece 9.00 points 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 wil have zero scrap value. The company's required rate of return is 1 Click here to view Exhibit 138-1 and Exhibit 1382, to determine the appropriate discount factorts) using table. 1. Determine the net present value of the investment in the machine. (Any cash outflows should be indicated by a minus sign. Use the appropriate table to determine the discount factorfs).) Purchase of machine Reduced operating costs Total cash flows Discount factor (11%) Present value 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.) Cosh Flow Year Item Annual cost savings 0

Explanation / Answer

Net Present Value = present Value of Cash inflow - present Value of Cash outflow

                          = 36957 - 44000 = (7043)

Note: Depriciation on machine is not considered in question as it is a non cash activity in business. but if we consider depriciation in determining NPV solution would be different.

2) Discounted cash flow (DCF) analysis is a method of valuing a project of a company, or asset using the concepts of the time value of money. All future cash flows are estimated and discounted by using cost of capital to give their present values (PVs). Whereas Undiscounted cash flows are Future cash amounts that have not been discounted to their present value.   Tota; cash flows or Total net cash flows are the income or outcome of cash in the business during the particular period.

                                                       

0 1 2 3 4 5 Purchased Machine (44000) Reduced Operating cost 10000 10000 10000 10000 10000 Total Cash Flows (44000) 10000 10000 10000 10000 10000 Discount Factor(11%) 1 .9009 .8116 .7311 .6587 .5934 Present Value (44000) 9009 8116 7311 6587 5934 (44000) 36957

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