Question & Answer: he management of Kunkel Company is considering the purchase of a $25,000…..

The management of Kunkel Company is considering the purchase of a $25,000 machine that would reduce operating costs by $6,000 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 11%.
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? (Any cash outflows should be indicated by a minus sign.)

 

Expert Answer

 

1) Net present value of machine
investment -25000
Saving in operating costs:
(6,000*3.69590) 22175
Net present value of machine -2825
( the 3.69590 is the present value of ordinary annuity at 11% for
Five years)
(the discount factor used is upto five decimal point, in case in your question
it is rounded please use that for exact answer)
2) undiscounted cash flow
investment -25000
Saving in operating costs:
(6000*5) 30,000
Net present value 5000
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