Question

The management of Kunkel Company is considering the purchase of a $33,000 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 salvage value. The company's required rate of return is 16%. 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? 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

Answer 1

1 Calculation of Net Present Value of the investment in the machine Now 1 2 3 Purchase of machine ($33,000) $0 $0 $0 Reduced operating costs $8,500 $8,500 $8,500 Total cash flows ($33,000) $8,500 $8,500 $8,500 Discount factor (16%) 1 0.862 0.743 0.641 Present value ($33,000) $7,327 $6,316 $5,449 Net present value ($5,171) 4 $0 $8,500 $8,500 0.552 $4,692 5 $0 $8,500 $8,500 0.476 $4,046 2 Calculation of difference between the total, undiscounted cash inflows and cash outflows over the entire Items Cash Flow Year Total Cash Flows Annual cost saving $8,500 $42,500 Initial Investment ($33,000) ($33,000) Net Cash Flow $9,500