Question

The management of Kunkel Company is considering the purchase of a $41,000 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%. 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

Answer 1

	Calculation of Net Present value
	Initial Outflow	41000
	Annual savings in operating costs	9000
	Term of machine	5	Years
	Required rate of return	12%
	Present value Annuity factor (12%, 5)	3.60477
	Present value	32443	(9000*3.604776)
1	Net Present value	Cash Inflows - Cash outflows
		32443 - 41000
		-8557	Answer
2	Total undiscounted inflows over 5 years	45000	(9000*5)
	Cash outflows	-41000
	Total difference in undiscounted cash inflows and outflows	4000	(45000-41000)