Question

The management of Kunkel Company is considering the purchase of a $29,000 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 16%. 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		Value in $	Discount Factor @ 16%	Discounted Cash Flow
Cash Outflow	Year 0	29000	1	29000
Cash Inflows	Year 1	6500	0.862	5603
Year 2	6500	0.7431	4830
Year 3	6500	0.6406	4164
Year 4	6500	0.5522	3589
Year 5	6500	0.4761	3095
			NPV of Cash Inflows	21281
		NPV	Inflow - Outflow	-7719
As Saving in Cost also termed as Inflow
Discount factor is 16%
Difference Between Undiscounted Cash Flow
2.		Value in $
Cash Outflow	Year 0	29000
Cash Inflows	Year 1	6500
Year 2	6500
Year 3	6500
Year 4	6500
Year 5	6500
Sum of Cash Inflows	32500
Cash Outflow	29000
Diff:	3500