Question

The management of Kunkel Company is considering the purchase of a $39,000 machine that would reduce operating costs by $9,000 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 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?

Answer 1

Solution 1:

Computation of NPV - Kunkel Company
Particulars	Period	Amount	PV factor at 11%	Present Value
Cash outflows:
Initial investment	0	$39,000.00	1	$39,000
Present Value of Cash outflows (A)				$39,000
Cash Inflows
Annual cash inflows	1-5	$9,000.00	3.6960	$33,264
Present Value of Cash Inflows (B)				$33,264
Net Present Value (NPV) (B-A)				-$5,736

Solution 2:

Difference between the total, undiscounted cash inflows and cash outflows over the entire life of the machine = ($9,000*5) - $39,000 = $6,000