Question

# The management of Kunkel Company is considering the purchase of a \$29,000 machine that would reduce...

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?

 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