CThe management of Kunkel Company is considering the purchase of a $37,000 machi

Question

CThe management of Kunkel Company is considering the purchase of a $37,000 machine that would reduce operating costs by $8,000 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 12%.

Required:

1.Determine the net present value of the investment in the machine. (Any cash outflows should be indicated by a minus sign. Use the appropriate table to determine the discount factor(s). Insert numbers into blank spots

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.) Insert numbers into blank spots

Total Cash Flows

Total Cash Flows

Explanation / Answer

Answer 1 Now 1 2 3 4 5 Purchase of Machine ($37,000) 0 0 0 0 0 Reduced Operating Costs 0 $8,000 $8,000 $8,000 $8,000 $8,000 Total Cash flows ($37,000) $8,000 $8,000 $8,000 $8,000 $8,000 Discount Factor (12%) 1 0.8929 0.7972 0.7118 0.6355 0.5674 Present Value -37000                   7,143                        6,378                 5,694                 5,084                   4,539 Net Present Value -8162 Answer 2 Item Cash Flow Years Total Cash Flows Annual Cost Savings $8,000 5 $40,000 Intial Investment $37,000 0 $37,000 Net Cash Flow $3,000

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