Question

1 Determine Net Present Value

2 What ia the difference between total, undiscounted cash inflows, and cash outflows for the entire life of machine?

2020 Ch 7 EOC 27pts Saved 1 Exercise 7-2 (Algo) Net Present Value Analysis [LO7-2] The management of Kunkel Company is considering the purchase of a $34,000 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 12% Doints Click here to view Exhibit 7B-1 and Exhibit 7B-2, to determine the appropriate discount factorts) using table. Required: L 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? ellook Hint Complete this question by entering your answers in the tabs below. Print Required 1 Required 2 Determine the net present value of the imnvestment 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).) References Net present value Required 2

Answer 1

1.

cost of machine = $34,000

Reduction in operating costs = $9,000 per year

Time period (n) = 5 years

Interest rate (i) = 12%

Present value of cash inflows = Annual saving in operating costs x Present value annuity factor ( i%, n)

= 9,000 x Present value annuity factor ( 12%,5)

= 9,000 x 3.60478

= $32,443

Net present value = Present value of cash inflows - Cost of machine

= 32,443-34,000

= -$1,557

2.

Total undiscounted cash inflows = 9,000 x 5

= $45,000

Difference between undicounted cash inflows and outflows = 45,000-34,000

= $11,000

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