Question

The management of Kunkel Company is considering the purchase of a $38,000 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 11%. Click here to view Exhibit 13B-1 and Exhibit 13B-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? (Any cash outflows should be indicated by a minus sign.)

Answer 1

1
	Now	1	2	3	4	5
Purchase of machine	-38000
Reduced operating costs		8500	8500	8500	8500	8500
Total cash flows	-38000	8500	8500	8500	8500	8500
Discount factor (11%)	1	0.901	0.812	0.731	0.659	0.593
Present value	-38000	7658.5	6902	6213.5	5601.5	5040.5
Net present value	-6584
2
	Cash Flow	Years	Total Cash Flows
Annual cost savings	8500	5	42500
Initial investment	-38000	1	-38000
Net cash flow			4500