Question
In: Accounting
Exercise 11-2 Net Present Value Method [LO11-2] The management of Kunkel Company is considering the purchase...
Exercise 11-2 Net Present Value Method [LO11-2]
|
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 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables. |
| 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.) |
Solutions
Expert Solution
| Statement showing Cash flows | ||||
| Particulars | Time | PVf 11% | Amount | PV |
| Cash Outflows | - | 1.00 | (25,000.00) | (25,000.00) |
| PV of Cash outflows = PVCO | (25,000.00) | |||
| Cash inflows | 1.00 | 0.9009 | 6,000.00 | 5,405.41 |
| Cash inflows | 2.00 | 0.8116 | 6,000.00 | 4,869.73 |
| Cash inflows | 3.00 | 0.7312 | 6,000.00 | 4,387.15 |
| Cash inflows | 4.00 | 0.6587 | 6,000.00 | 3,952.39 |
| Cash inflows | 5.00 | 0.5935 | 6,000.00 | 3,560.71 |
| PV of Cash Inflows =PVCI | 22,175.38 | |||
| NPV= PVCI - PVCO | (2,824.62) | |||
| 2) | ||||
| Value of total, undiscounted cash inflows | 30,000.00 | |||
| cash outflows | (25,000.00) | |||
| Difference | 5,000.00 | |||
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