Question

value 10.00 points Exercise 13-2 Net Present Value Method [LO13-2] The management of Kunkel Company is considering the purchase of a $28,000 machine that would reduce operating costs by $7,000 per year. At the end of the machine's five-year useful life, it will have zero scrap value. The company's required rate of return is 13% 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 Net present value 3,379 2. What is the difference between the total, undiscounted cash inflows and cash outflows over the entire life of the machine? (Any cash outflows should be indicated by a minus sign.) Total Cash Flows Item Cash Flow Years Annual cost savingsS Initial investmen S (28,000) Net cash flow 7,000 5 $35,000 (28,000) 7,000

Answer 1

SOLUTION

(A)

Item	Years	Cash flow ($)(A)	13% factor (B)	Present value of cash flows ($) (A*B)
Annual cost savings	1-5	7,000	3.5173	24,621
Initial investment	Now	(28,000)	1.000	(28,000)
Net present value				(3,379)

(B)

Item	Cash flow	Years	Total cash flows
Annual cost savings	7,000	5	35,000
Initial investment	(28,000)	1	(28,000)
Net cash flow			7,000