Question

The management of Kunkel Company is considering the purchase of a $43,000 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 12B-1 and Exhibit 12B-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

Answer:

Part 1)

Year 0 1 2 Cash Flow PVF[1/(1+r)^n] Present Value -43,000 1.0000 -43000.00 9,000 0.8929 8035.71 9,000 0.7972 7174.74 9,000 0.7118 6406.02 9,000 0.6355 5719.66 9,000 0.5674 5106.84 Total -10557.01 3 4 5

Thus Net present value=$-10,557.01

Part 2)

Total undiscounted cash inflows=9,000*5=45,000

Total cash outflow=43,000

Difference=45,000-43,000=$2,000

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