Question

The management of Kunkel Company is considering the purchase of a $35,000 machine that would reduce operating costs by $8,500 per year. At the end of the machine’s five-year useful life, it will have zero scrap value. The company’s required rate of return is 16%.

Click here to view Exhibit 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables.

    

Required:

1.

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.)

Determine the net present value of the investment in the machine.

Answer 1

Solution 1:

Computation of NPV - Kunkel Company
Particulars	Amount	Period	PV Factor	Present Value
Cash Outflows:
Cost of Investment	$35,000.00	0	1	$35,000.00
Present Value of Cash Outflows (A)				$35,000.00
Cash Inflows:
Annual cost saving in operating cost	$8,500.00	1-5	3.274294	$27,831.50
Present Value of Cash Inflows (B)				$27,831.50
Net Present Value (B-A)				-$7,168.50

Solution 2:

Item	Cash Flow	Years	Total Cash Flows
Annual cost savings	$8,500.00	5	$42,500.00
Initial investment	$35,000.00	1	$35,000.00
Difference in undiscounted cash inflows and outflows			$7,500.00