Question

The management of Kunkel Company is considering the purchase of a $30,000 machine that would reduce operating costs by $6,500 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 12%. Click here to view Exhibit 12B-1 and Exhibit 12B-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?

Answer 1

1. Net present value of the investment in the machine

Year	0	1	2	3	4	5
Initial investment	-30000
Saving in Operating cost		6500	6500	6500	6500	6500
Cash flows	-30000	6500	6500	6500	6500	6500
PVF	1	0.892857	0.797194	0.71178	0.635518	0.567427
PV of cashflows	-30000	5803.571	5181.76	4626.57	4130.87	3688.27
Net Present Value	-6568.95

2.

Difference between the total, undiscounted cash inflows and cash outflows over the entire life of the machine

Item	Cash Flow	Years	Total cash Flows
Annual cost savings	6500	5	32500
Initial Investment	(30000)	1	(30000)
Net cash flow			2500