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 | |||

The management of Kunkel Company is considering the purchase of
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