Question

The management of Kunkel Company is considering the purchase of a $42,000 machine that would reduce operating costs by $9,500 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 118 Click here to view Exhibit 7B-1 and Exhibit 7B-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? Complete this question by entering your answers in the tabs below. Required 1 Required 2 Determine the net present value of the investment in the machine. (Negative amounts should be indicated by a minus sign. Round your final answer to the nearest whole dollar amount. Use the appropriate table to determine the discount factor(s).) Net present value Required 1 Required 2 >

Answer 1

Solution 1:

Computation of NPV
Particulars	Period	PV Factor	Amount	Present Value
Cash outflows:
Initial investment	0	1	$42,000	$42,000
Present Value of Cash outflows (A)				$42,000
Cash Inflows
Annual cash inflows	1-5	3.69590	$9,500	$35,111
Present Value of Cash Inflows (B)				$35,111
Net Present Value (NPV) (B-A)				-$6,889

Solution 2:

Total difference in undiscounted cash inflows and outflows = ($9,500*5) - $42,000 = $5,500

Note: As factor tables are not provided, i have rounded off PV factor upto 5 decimal places. therefore actual answer may differ due to rounding off differences.