Question

The management of Kunkel Company is considering the purchase of a $35,000 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 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? 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 amount should be indicated by a minus sign. Use the appropriate table to determine the discount factor(s). Round your final answer to the nearest whole dollar amount.) Net present value Required 1 Required 2 >

Answer 1

Please find the attached sheets,

Summary-

Net present value is difference between discounted cash inflow and discounted cash outflow. Here one thing must be considered,any saving in cost is equal to cash inflow.

In the given case the saving in cost by employing new equipment is equal to cash inflows.

Undiscounted cash inflows are higher than undiscounted cash outflow. However while calculating the discounted cashflows, the cash outflows exceeds the discounted cash inflow.Hence project must not be continued with.

Please comment for any explanation.

Thanks,

X х Cla 9 9.aug - Microsoft Excel Home Insert Page Layout Formulas Data Review View X % Cut Σ AutoSum Times New Rom - 11 - A A A 2 Wrap Text General Eg Copy Fill Paste BI U Merge & Center 4.0 .00 .00 0 Insert Delete Format Format Painter Conditional Format Cell Formatting as Table - Styles Styles 2 Clear Sort & Find & Filter - Select Editing Clipboard Font Alignment Number Cells D17 A B c D E F G H 1 J K L M N 0 Solution- 1 2 3 Information Given 4 Initial Investment 5 Cash inflows per annum 6 Period 7 Rate of return 8 9 350001 8500 5 16% Statement showing the Net Present Value Period Cashflows Discount Rate Discounted Cashflows 0 -35000 1 -35000 1 1 8500 0.862068966 7327.586207 2 8500 0.743162901 6316.884661 3 8500 0.640657674 5445.590225 4 8500 0.552291098 4694.474332 5 8500 0.476113015 4046.960631 Net Present Value -7168.503944 10 11 12 13 2 Total difference in undiscounted cash inflow and cash outflow- 75001 Total Undiscounted Cashinflow- Total Undiscounted Cashoutflow- 42500 35000 14 15 16 17 O 18 19 20 21 22 23 24 25 Sheet1 Sheet2 Sheet4 Sheet3 IIII Ready BO 0 100% + O X: 09:03 16-09-2020

X х Cla 9 9.aug - Microsoft Excel Home Insert Page Layout Formulas Data Review View ? X 4 Cut Σ AutoSum Times New Rom-11 - A A A 2 Wrap Text General La Copy Fill Paste BI U *Merge & Center 4.0 .00 .00 0 Insert Delete Format Format Painter 2 Clear Conditional Format Cell Formatting as Table - Styles Styles Sort & Find & Filter - Select - Editing Clipboard Font Alignment Number Cells E18 A B C D E F G H 1 J K L 1 2 3 Information Given 4 Initial Investment 35000 5 Cash inflows per annum 8500 6 Period 5 7 Rate of return 0.16 8 9 Solution- 1 Statement showing the Net Present Value Period Cashflows Discount Rate Discounted Cashflows 0 =+-B4 =1/1.16 ES =+F5*G5 1 8500 =1/1.16 E6 =+F6*G6 2 8500 =1/1.16 E7 / =+F7*G7 3 8500 =1/1.16 ES =+F8*G8 4 8500 =1/1.16 E9 =+F9*G9 5 8500 =1/1.16 E10 =+F10*G10 Net Present Value =SUM(H5:H10) 10 11 12 13 2 otal difference in undiscounted cash inflow and cash outflow=+L13-L 14 Total Undiscounted Cashinflow-=+SUM(F6:F10) Total Undiscounted Cashoutflow-=+B4 14 15 16 17 18 19 20 21 22 23 24 25 Sheet1 Sheet2 Sheet4 Sheet3 Ready BO 100% - + о IL 1 09:04 16-09-2020